
			Gross		Gross		Allowance		Estimated
December 31, 2019	Amortized		Unrealized		Unrealized		for Credit		Fair
(dollars in thousands)	Cost		Gains		Losses		Losses		Value
U. S. agency securities	$	180,228	$	621	$	1,055	$	—	$	179,794
Residential mortgage backed securities		541,490		4,337		1,975		—		543,852
Municipal bonds		71,902		2,034		5		—		73,931
Corporate bonds		10,530		203		—		—		10,733
U.S. Treasury		34,844		11		—		—		34,855
Other equity investments		198		—		—		—		198
	$	839,192	$	7,206	$	3,035	$	—	$	843,363

Gross Gross Estimated
September 30, 2019 Amortized Unrealized Unrealized Fair
(dollars in thousands) Cost Gains Losses Value
U. S. agency securities $ 171,585 $ 941 $ 706 $ 171,820
Residential mortgage backed securities 434,042 5,404 1,417 438,029
Municipal bonds 61,680 2,278 — 63,958
Corporate bonds 9,532 82 — 9,614
U.S. Treasury 24,919 7 — 24,926
Other equity investments 198 — — 198
$ 701,956 $ 8,712 $ 2,123 $ 708,545

Gross Gross Estimated
December 31, 2018 Amortized Unrealized Unrealized Fair
(dollars in thousands) Cost Gains Losses Value
U. S. agency securities $ 260,150 $ 228 $ 4,033 $ 256,345
Residential mortgage backed securities 477,949 1,575 7,293 472,231
Municipal bonds 45,814 439 484 45,769
Corporate bonds 9,503 79 6 9,576
Other equity investments 218 — — 218
$ 793,634 $ 2,321 $ 11,816 $ 784,139

In addition, at ~~September~~June 30, ~~2019~~2020 and December 31, ~~2018~~2019 the Company held $~~28.7~~$40.0 million and $~~23.5~~$35.2 million,, respectively, in equity securities in a combination of Federal Reserve Bank (“FRB”) and Federal Home Loan Bank (“FHLB”) stocks, which are required to be held for regulatory purposes and which are not marketable, and therefore are carried at cost.

Accrued interest on available-for-sale securities totaled $2.7 million and $3.2 million at June 30, 2020 and December 31, 2019, respectively, and was included in other assets in the consolidated balance sheets.

Gross unrealized losses and fair value of available-for-sale securities for which an allowance for credit losses has not been recorded, by length of time that ~~the~~ individual ~~available-for-sale~~ securities have been in a continuous unrealized loss position are as follows:


		Less than				12 Months
		12 Months				or Greater				Total
		Estimated				Estimated				Estimated
June 30, 2020	Number of	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
(dollars in thousands)	Securities	Value		Losses		Value		Losses		Value		Losses
U. S. agency securities	25	$	24,653	$	99	$	37,287	$	650	$	61,940	$	749
Residential mortgage backed securities	20		41,864		66		7,721		49		49,585		115
Corporate bonds	2		4,447		78		—		—		4,447		78
	47	$	70,964	$	243	$	45,008	$	699	$	115,972	$	942


		Less than				12 Months
		12 Months				or Greater				Total
		Estimated				Estimated				Estimated
December 31, 2019	Number of	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
(dollars in thousands)	Securities	Value		Losses		Value		Losses		Value		Losses
U. S. agency securities	36	$	75,159	$	439	$	51,481	$	616	$	126,640	$	1,055
Residential mortgage backed securities	111		197,794		1,148		90,742		827		288,536		1,975
Municipal bonds	1		1,994		5		—		—		1,994		5
	148	$	274,947	$	1,592	$	142,223	$	1,443	$	417,170	$	3,035

The majority of the AFS debt securities in an unrealized loss position as of June 30, 2020, consisted of debt securities issued by U.S. government agencies or U.S. government-sponsored enterprises. These securities carry the explicit and/or implicit guarantee of the U.S. government, are widely recognized as “risk free,” and have a long history of zero credit loss.

Less than 12 Months
12 Months or Greater Total
Estimated Estimated Estimated
September 30, 2019 Number of Fair Unrealized Fair Unrealized Fair Unrealized
(dollars in thousands) Securities Value Losses Value Losses Value Losses
U. S. agency securities 32 $ 36,162 $ 132 $ 59,843 $ 574 $ 96,005 $ 706
Residential mortgage backed securities 98 53,769 287 116,438 1,130 170,207 1,417
Municipal bonds 1 30 — — — 30 —
131 $ 89,961 $ 419 $ 176,281 $ 1,704 $ 266,242 $ 2,123

Less than 12 Months
12 Months or Greater Total
Estimated Estimated Estimated
December 31, 2018 Number of Fair Unrealized Fair Unrealized Fair Unrealized
(dollars in thousands) Securities Value Losses Value Losses Value Losses
U. S. agency securities 58 $ 72,679 $ 533 $ 144,636 $ 3,500 $ 217,315 $ 4,033
Residential mortgage backed securities 151 61,199 527 225,995 6,766 287,194 7,293
Municipal bonds 11 4,299 50 17,041 434 21,340 484
Corporate bonds 1 1,494 6 — — 1,494 6
221 $ 139,671 $ 1,116 $ 387,672 $ 10,700 $ 527,343 $ 11,816

~~The~~As of June 30, 2020, total gross unrealized losses were primarily attributable to changes in interest rates, relative to when the investment securities were purchased, and not due to the credit quality of the investment securities. However, as of June 30, 2020, the Company determined that ~~exist are generally~~part of the unrealized loss positions in AFS corporate and municipal securities could be the result of ~~changes in market interest rates~~credit losses, and ~~interest spread relationships since original purchases.~~therefore, an allowance for credit losses of $138 thousand was recorded. The weighted average duration of debt securities, which comprise ~~99.9~~%99.9% of total investment securities, is relatively short at ~~2.9 years~~ .3.1 years. If quoted prices are not available, fair value is measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the ~~security’s~~security's credit rating, prepayment assumptions and other factors such as credit loss assumptions. ~~The Company does not believe that the investment securities that were in an unrealized loss position as of September 30, 2019 represent an other-than-temporary impairment.~~ The Company does not intend to sell the investments and it is more likely than not that the Company will not have to sell the securities before recovery of its amortized cost basis, which may be at maturity.

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The amortized cost and estimated fair value of investments available-for-sale at ~~September~~June 30, ~~2019~~2020 and December 31, ~~2018~~2019 by contractual maturity are shown in the table below. Expected maturities for residential mortgage backed securities (“MBS”) will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.


	June 30, 2020				December 31, 2019
	Amortized		Estimated		Amortized		Estimated
(dollars in thousands)	Cost		Fair Value		Cost		Fair Value
U. S. agency securities maturing:
One year or less	$	34,038	$	34,219	$	96,332	$	96,226
After one year through five years		77,465		78,008		76,121		75,821
Five years through ten years		4,720		4,827		7,775		7,747
Residential mortgage backed securities		516,297		531,528		541,490		543,852
Municipal bonds maturing:
One year or less		7,382		7,437		5,897		5,969
After one year through five years		19,797		20,703		21,416		21,953
Five years through ten years		51,195		54,407		42,589		44,015
After ten years		8,000		8,160		2,000		1,994
Corporate bonds maturing:
One year or less		10,929		11,312		502		508
After one year through five years		15,407		15,999		8,528		8,725
After ten years		5,225		5,734		1,500		1,500
U.S. treasury		—		—		34,844		34,855
Other equity investments		198		198		198		198
Allowance for Credit Losses		—		(138)		—		—
	$	750,653	$	772,394	$	839,192	$	843,363

September 30, 2019 December 31, 2018
Amortized Estimated Amortized Estimated
(dollars in thousands) Cost Fair Value Cost Fair Value
U. S. agency securities maturing:
One year or less $ 78,924 $ 79,178 $ 128,148 $ 125,545
After one year through five years 79,835 79,809 119,856 118,883
Five years through ten years 12,826 12,833 12,146 11,917
Residential mortgage backed securities 434,042 438,029 477,949 472,231
Municipal bonds maturing:
One year or less 6,116 6,185 8,097 8,167
After one year through five years 16,474 16,940 15,025 15,081
Five years through ten years 36,028 37,540 21,626 21,385
After ten years 3,062 3,293 1,066 1,136
Corporate bonds maturing:
After one year through five years 8,032 8,114 8,003 8,076
After ten years 1,500 1,500 1,500 1,500
U.S. Treasury 24,919 24,926 — —
Other equity investments 198 198 218 218
$ 701,956 $ 745,343 $ 793,634 $ 784,139

For the ~~nine~~six months ended ~~September~~June 30, 2020, gross realized gains on sales of investments securities were $1.5 million and there were 0 gross realized losses on sales of investment securities. For the six months ended June 30, 2019, gross realized gains on sales of investments securities were $~~1.6~~$1.5 million, primarily due to $~~829~~the $829 thousand of noninterest income recognized during March 2019 on interest rate swap terminations, and $~~20 thousand~~there were 0 gross realized losses on sales of investment securities. ~~For the nine months ended September 30, 2018, gross realized gains on sales of investments securities were $93 thousand~~ ~~and gross realized losses on sales of investment securities were $25 thousand~~.

Proceeds from sales and calls of investment securities for the ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 were$~~129.9~~120.0 million compared to $~~42.1~~$42.1 million for the same period in ~~2018.~~2019.

The carrying value of securities pledged as collateral for certain government deposits, securities sold under agreements to repurchase, and certain lines of credit with correspondent banks at ~~September~~June 30, ~~2019~~2020 and December 31, ~~2018~~2019 was $~~439.4~~$346 million and $~~528.2~~$378 million,, respectively, which is well in excess of required amounts in order to operationally provide significant reserve amounts for new business. As of ~~September~~June 30, ~~2019~~2020 and December 31, ~~2018,~~2019, there were no holdings of securities of any one issuer, other than the U.S. Government and U.S. agency securities, which exceeded 10 percent of shareholders’ equity.

Note 4. Mortgage Banking ~~Derivative~~Derivatives

As part of its mortgage banking activities, the Bank enters into interest rate lock commitments, which are commitments to originate loans where the interest rate on the loan is determined prior to funding and the customers have locked into that interest rate. The Bank then locks in the loan and interest rate with an investor and commits to deliver the loan if settlement occurs (“best efforts”) or commits to deliver the locked loan in a binding (“mandatory”) delivery program with an investor. Certain loans under interest rate lock commitments are covered under forward sales contracts of mortgage backed ~~securities (“MBS”).~~securities. Forward sales contracts of MBS are recorded at fair value with changes in fair value recorded in noninterest income. Interest rate lock commitments and commitments to deliver loans to investors are considered derivatives. The market value of interest rate lock commitments and best efforts contracts are not readily ascertainable with precision because they are not actively traded in stand-alone markets. The Bank determines the fair value of interest rate lock commitments and delivery contracts by measuring the fair value of the underlying asset, which is impacted by current interest rates, taking into consideration the probability that the interest rate lock commitments will close or will be funded.

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Certain additional risks arise from these forward delivery contracts in that the counterparties to the contracts may not be able to meet the terms of the contracts. The Bank does not expect any counterparty to any MBS to fail to meet its obligation. Additional risks inherent in mandatory delivery programs include the risk that, if the Bank does not close the loans subject to interest rate risk lock commitments, it will still be obligated to deliver MBS to the counterparty under the forward sales agreement. Should this be required, the Bank could incur significant costs in acquiring replacement loans or MBS and such costs could have an adverse effect on mortgage banking operations.

The fair value of the mortgage banking derivatives is recorded as a freestanding asset or liability with the change in value being recognized in current earnings during the period of change.

At ~~September~~June 30, 2020, the Bank had no material mortgage banking derivative financial instruments. During the second quarter of 2020, the Company suspended locking loans for sale on a mandatory basis as a result of significant market dislocation that was experienced as a result of COVID-19 as well as the operational strain associated with the mandatory underwriting process given the volume of residential mortgages. At June 30, 2019 the Bank had mortgage banking derivative financial instruments with a notional value of $~~134.3~~$124.5 million related to its forward ~~contracts as compared to $49.6 million~~ ~~at December 31, 2018.~~contracts. The fair value of these mortgage banking derivative instruments at ~~September 30,~~December 31, 2019 was $~~313~~$280 thousand included in other assets and $3$66 thousand included in other ~~liabilities as compared to $229 thousand~~ ~~included in other assets and $269 thousand~~ ~~included in other liabilities at December 31, 2018.~~liabilities.

Included in other noninterest income for the three and ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 was a net gain of $30 ~~thousand~~$1.1 million and a net ~~gain $249~~ loss of $165 thousand ~~respectively,~~ relating to mortgage banking derivative instruments as compared to a net ~~loss~~gain of $10$84 thousand and net ~~loss~~gain of $42 $219 thousand ~~as of September~~for the three and six months ended June 30, ~~2018.~~2019. The amount included in other noninterest income for the three and ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 pertaining to its mortgage banking hedging activities was a net realized gain of $~~277 thousand~~$1.3 million and a net ~~realized gain~~loss of $~~228~~$7 thousand,, respectively, as compared to a net ~~realized gain~~loss of $56$94 thousand and no net ~~realized gain as~~loss of ~~September~~$49 thousand, respectively, for the three and six months ended June 30, ~~2018.~~2019.

Note 5. Loans and Allowance for Credit Losses

The Bank makes loans to customers primarily in the Washington, D.C. metropolitan area and surrounding communities. A substantial portion of the Bank’s loan portfolio consists of loans to businesses secured by real estate and other business assets.

Loans, net of unamortized net deferred fees, at ~~September~~June 30, ~~2019~~2020 (unaudited) and December 31, ~~2018~~2019 are summarized by type as follows:


	June 30, 2020					December 31, 2019
(dollars in thousands)	Amount			%		Amount		%
Commercial	$	1,607,056		20	%	$	1,545,906	20	%
PPP loans		456,476		6	%		—	—
Income producing - commercial real estate		3,678,946		46	%		3,702,747	50	%
Owner occupied - commercial real estate		964,077		12	%		985,409	13	%
Real estate mortgage - residential		93,601		1	%		104,221	1	%
Construction - commercial and residential		995,550		12	%		1,035,754	14	%
Construction - C&I (owner occupied)		149,845		2	%		89,490	1	%
Home equity		74,921		1	%		80,061	1	%
Other consumer		1,289		—			2,160	—
Total loans		8,021,761		100	%		7,545,748	100	%
Less: allowance for credit losses		(108,796)					(73,658)
Net loans	$	7,912,965	(1)			$	7,472,090

(1)	Excludes accrued interest receivable of $36.2 million and $21.3 million at June 30, 2020 and December 31, 2019, respectively, which is recorded in other assets.

September 30, 2019 December 31, 2018
(dollars in thousands) Amount % Amount %
Commercial $ 1,466,862 19 % $ 1,553,112 22 %
Income producing - commercial real estate 3,812,284 51 % 3,256,900 46 %
Owner occupied - commercial real estate 956,345 13 % 887,814 13 %
Real estate mortgage - residential 104,563 1 % 106,418 2 %
Construction - commercial and residential 1,053,789 14 % 1,039,815 15 %
Construction - C&I (owner occupied) 81,916 1 % 57,797 1 %
Home equity 81,117 1 % 86,603 1 %
Other consumer 2,285 — 2,988 —
Total loans 7,559,161 100 % 6,991,447 100 %
Less: allowance for credit losses (73,720 ) (69,944 )
Net loans $ 7,485,441 $ 6,921,503

Unamortized net deferred fees amounted to $~~24.5~~$34.8 million and $~~26.5~~$25.2 million at ~~September~~June 30, ~~2019~~2020 and December 31, ~~2018,~~2019, respectively.

As of ~~September~~June 30, ~~2019~~2020 and December 31, ~~2018,~~2019, the Bank serviced $~~102.9~~$96 million and $~~111.1~~$99 million, respectively, of multifamily FHA loans, SBA loans and other loan participations which are not reflected as loan balances on the Consolidated Balance Sheets.

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Loan Origination / Risk Management

The Company’s goal is to mitigate risks in the event of unforeseen threats to the loan portfolio as a result of economic downturn or other negative influences. Plans for mitigating inherent risks in managing loan assets include: carefully enforcing loan policies and procedures, evaluating each borrower’s business plan during the underwriting process and throughout the loan term, identifying and monitoring primary and alternative sources for loan repayment, and obtaining collateral to mitigate economic loss in the event of liquidation. Specific loan reserves are established based upon credit and/or collateral risks on an individual loan basis. A risk rating system is employed to proactively estimate loss exposure and provide a measuring system for setting general and specific reserve allocations.

The composition of the Company’s loan portfolio is heavily weighted toward commercial real estate, both owner occupied and income producing real estate. At ~~September~~June 30, ~~2019,~~2020, owner occupied - commercial real estate and construction - – Commercial and Industrial (“C&I&I”) (owner occupied) represent approximately 14%14% of the loan ~~portfolio.~~portfolio . At ~~September~~June 30, ~~2019,~~2020, non-owner occupied commercial real estate and real estate construction represented approximately 65%58% of the loan portfolio. The combined owner occupied and commercial real estate and construction loans represent approximately 79%72% of the loan portfolio. Real estate also serves as collateral for loans made for other purposes, resulting in 85%79% of all loans being secured by real estate. These loans are underwritten to mitigate lending risks typical of this type of loan such as declines in real estate values, changes in borrower cash flow and general economic conditions. The Bank typically requires a maximum loan to value of 80%80% and minimum cash flow debt service coverage of 1.15 to ~~1.0~~.1.0. Personal guarantees may be required, but may be limited. In making real estate commercial mortgage loans, the Bank generally requires that interest rates adjust not less frequently than five years.

The Company is also an active traditional commercial lender providing loans for a variety of purposes, including working capital, equipment and account receivable financing. This loan category represents approximately 19%20% of the loan portfolio at ~~September~~June 30, ~~2019~~2020 and was generally variable or adjustable rate. Commercial loans meet reasonable underwriting standards, including appropriate collateral and cash flow necessary to support debt service. Personal guarantees are generally required, but may be limited. SBA loans represent approximately 2%1.3% of the commercial loan category. In originating SBA loans, the Company assumes the risk of non-payment on the unguaranteed portion of the credit as well as potential repairs to the SBA guarantees. The Company generally sells the guaranteed portion of the loan generating noninterest income from the gains on sale, as well as servicing income on the portion participated. SBA loans are subject to the same cash flow analyses as other commercial loans. SBA loans are subject to a maximum loan size established by the SBA as well as internal loan size guidelines.

Approximately 1%6% of the loan portfolio at ~~September~~June 30, ~~2019~~2020 consists of PPP loans to eligible customers. PPP loans are expected to primarily be repaid via forgiveness from the SBA. These loans are fully guaranteed as to principal and interest by the SBA and ultimately by the full faith and credit of the U.S. Government; as a result, they were approved utilizing different underwriting standards than the Bank's other commercial loans. PPP loans are included in the CECL model but do not carry an allowance for credit loss due to the aforementioned government guarantees.

Approximately 1% of the loan portfolio at June 30, 2020 consists of home equity loans and lines of credit and other consumer loans. These credits, while making up a small portion of the loan portfolio, demand the same emphasis on underwriting and credit evaluation as other types of loans advanced by the Bank.

Approximately 1%1% of the loan portfolio consists of residential mortgage loans. The repricing duration of these loans was 2216 months. These credits represent first liens on residential property loans originated by the Bank. While the Bank’s general practice is to originate and sell (servicing released) loans made by its Residential Lending department, from time to time certain loan characteristics do not meet the requirements of third party investors and these loans are instead maintained in the Bank’s portfolio until they are resold to another investor at a later date or mature.

Loans are secured primarily by duly recorded first deeds of trust or mortgages. In some cases, the Bank may accept a recorded junior trust position. In general, borrowers will have a proven ability to build, lease, manage and/or sell a commercial or residential project and demonstrate satisfactory financial condition. Additionally, an equity contribution toward the project is customarily required.

Construction loans require that the financial condition and experience of the general contractor and major subcontractors be satisfactory to the Bank. Guaranteed, fixed price contracts are required whenever appropriate, along with payment and performance bonds or completion bonds for larger scale projects.

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Loans intended for residential land acquisition, lot development and construction are made on the premise that the land: 1) is or will be developed for building sites for residential structures, ~~and;~~and 2) will ultimately be utilized for construction or improvement of residential zoned real properties, including the creation of housing. Residential development and construction loans will finance projects such as single family subdivisions, planned unit developments, townhouses, and condominiums. Residential land acquisition, development and construction loans generally are underwritten with a maximum term of 36 months, including extensions approved at origination.

Commercial land acquisition and construction loans are secured by real property where loan funds will be used to acquire land and to construct or improve appropriately zoned real property for the creation of income producing or owner user commercial properties. Borrowers are generally required to put equity into each project at levels determined by the appropriate Loan Committee. Commercial land acquisition and construction loans generally are underwritten with a maximum term of 24 months.

Substantially all construction draw requests must be presented in writing on American Institute of Architects documents and certified either by the contractor, the borrower and/or the borrower’s architect. Each draw request shall also include the borrower’s soft cost breakdown certified by the borrower or their Chief Financial Officer. Prior to an advance, the Bank or its contractor inspects the project to determine that the work has been completed, to justify the draw requisition.

Commercial permanent loans are generally secured by improved real property which is generating income in the normal course of operation. Debt service coverage, assuming stabilized occupancy, must be satisfactory to support a permanent loan. The debt service coverage ratio is ordinarily at least 1.15 to ~~1.0~~.1.0. As part of the underwriting process, debt service coverage ratios are stress tested assuming a 200 basis point increase in interest rates from their current levels.

Commercial permanent loans generally are underwritten with a term not greater than 10 years or the remaining useful life of the property, whichever is lower. The preferred term is between 5 to 7 years, with amortization to a maximum of 25 years.

The Company’s loan portfolio includes ~~ADC~~acquisition, development and construction (“ADC”) real estate loans including both investment and owner occupied projects. ADC loans amounted to $~~1.66~~$1.47 billion at ~~September~~June 30, ~~2019.~~2020. A portion of the ADC portfolio, both speculative and non-speculative, includes loan funded interest reserves at origination. ADC loans that provide for the use of interest reserves represent approximately 71%59% of the outstanding ADC loan portfolio at ~~September~~June 30, ~~2019.~~2020. The decision to establish a loan-funded interest reserve is made upon origination of the ADC loan and is based upon a number of factors considered during underwriting of the credit including: (1) the feasibility of the project; (2) the experience of the sponsor; (3) the creditworthiness of the borrower and guarantors; (4) the borrower equity contribution; and (5) the level of collateral protection. When appropriate, an interest reserve provides an effective means of addressing the cash flow characteristics of a properly underwritten ADC loan. The Company recognizes that one of the risks inherent in the use of interest reserves is the potential masking of underlying problems with the project and/or the borrower’s ability to repay the loan. In order to mitigate this inherent risk, the Company employs a series of reporting and monitoring mechanisms on all ADC loans, whether or not an interest reserve is provided, including: (1) construction and development timelines which are monitored on an ongoing basis which track the progress of a given project to the timeline projected at origination; (2) a construction loan administration department independent of the lending function; (3) third party independent construction loan inspection reports; (4) monthly interest reserve monitoring reports detailing the balance of the interest reserves approved at origination and the days of interest carry represented by the reserve balances as compared to the then current anticipated time to completion and/or sale of speculative projects; and (5) quarterly commercial real estate construction meetings among senior Company management, which includes monitoring of current and projected real estate market conditions. If a project has not performed as expected, it is not the customary practice of the Company to increase loan funded interest reserves.

The following tables detail activity in the allowance for credit losses by portfolio segment for the three and ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 and ~~2018.~~2019. PPP loans are excluded from these tables since they do not carry an allowance for credit loss, as these loans are fully guaranteed as to principal and interest by the SBA, whose guarantee is backed by the full faith and credit of the U.S.

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Government. Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories.


			Income Producing -		Owner Occupied -		Real Estate		Construction -
			Commercial		Commercial		Mortgage -		Commercial and		Home		Other
(dollars in thousands)	Commercial		Real Estate		Real Estate		Residential		Residential		Equity		Consumer		Total
Three Months Ended June 30, 2020
Allowance for credit losses:
Balance at beginning of period	$	27,346	$	43,551	$	9,867	$	1,369	$	13,341	$	818	$	44		96,336
Loans charged-off		(7,145)		—		—		—		—		—		—		(7,145)
Recoveries of loans previously charged-off		5		—		—		—		—		—		1		6
Net loans charged-off		(7,140)		—		—		—		—		—		1		(7,139)
Provision for credit losses		7,872		8,312		2,474		181		467		294		(1)		19,599
Ending balance	$	28,078	$	51,863	$	12,341	$	1,550	$	13,808	$	1,112	$	44	$	108,796

Six Months Ended June 30, 2020
Allowance for credit losses:
Balance at beginning of period, prior to adoption of ASC 326	$	15,857	$	28,034	$	6,242	$	965	$	18,175	$	599	$	72	$	69,944
Impact of adopting ASC 326		892		11,230		4,674		(301)		(6,143)		245		17		10,614
Loans charged-off		(7,145)		(550)		—		—		(1,768)		—		—		(9,463)
Recoveries of loans previously charged-off		74		—		—		—		—		—		4		78
Net loans (charged-off) recoveries		(7,071)		(550)		—		—		(1,768)		—		4		(9,385)
Provision for credit losses		18,400		13,149		1,425		886		3,544		268		(49)		37,623
Ending balance	$	28,078	$	51,863	$	12,341	$	1,550	$	13,808	$	1,112	$	44	$	108,796

As of June 30, 2020
Allowance for credit losses:
Individually evaluated for impairment	$	8,797	$	5,260	$	405	$	746	$	1,383	$	107	$	3	$	16,701
Collectively evaluated for impairment		19,281		46,603		11,936		804		12,425		1,005		41		92,095
Ending balance	$	28,078	$	51,863	$	12,341	$	1,550	$	13,808	$	1,112	$	44	$	108,796

Three Months Ended June 30, 2019
Allowance for credit losses:
Balance at beginning of period	$	17,195	$	26,765	$	5,980	$	681	$	18,469	$	605	$	248	$	69,943
Loans charged-off		(1)		(1,847)		—		—		—		—		(2)		(1,850)
Recoveries of loans previously charged-off		37		302		2		2		37		—		13		393
Net loans charged-off		36		(1,545)		2		2		37		—		11		(1,457)
Provision for credit losses		905		1,790		(226)		672		500		(24)		(17)		3,600
Ending balance	$	18,136	$	27,010	$	5,756	$	1,355	$	19,006	$	581	$	242	$	72,086

Six Months Ended June 30, 2019
Allowance for credit losses:
Balance at beginning of period	$	15,857	$	28,034	$	6,242	$	965	$	18,175	$	599	$	72	$	69,944
Loans charged-off		(5)		(5,343)		—		—		—		—		(2)		(5,350)
Recoveries of loans previously charged-off		167		302		2		3		37		—		21		532
Net loans (charged-off) recoveries		162		(5,041)		2		3		37		—		19		(4,818)
Provision for credit losses		2,117		4,017		(488)		387		794		(18)		151		6,960
Ending balance	$	18,136	$	27,010	$	5,756	$	1,355	$	19,006	$	581	$	242	$	72,086

As of June 30, 2019
Allowance for credit losses:
Individually evaluated for impairment	$	7,905	$	1,000	$	475	$	650	$	—	$	—	$	—	$	10,030
Collectively evaluated for impairment		10,231		26,010		5,281		705		19,006		581		242		62,056
Ending balance	$	18,136	$	27,010	$	5,756	$	1,355	$	19,006	$	581	$	242	$	72,086

Income
Producing -
Commercial

Owner
Occupied - Commercial

Real Estate
Mortgage -

Construction -
Commercial and
Home Other
(dollars in thousands) Commercial Real Estate Real Estate Residential Residential Equity Consumer Total

Three Months Ended September 30, 2019
Allowance for credit losses:
Balance at beginning of period $ 18,136 $ 27,010 $ 5,756 $ 1,355 $ 19,006 $ 581 $ 242 $ 72,086
Loans charged-off (1,794 ) — — — — — — (1,794 )
Recoveries of loans previously charged-off 210 — — — 15 — 17 242
Net loans charged-off (1,584 ) — — — 15 — 17 (1,552 )
Provision for credit losses 1,617 1,517 (158 ) (3 ) 251 (6 ) (32 ) 3,186
Ending balance $ 18,169 $ 28,527 $ 5,598 $ 1,352 $ 19,272 $ 575 $ 227 $ 73,720

Nine Months Ended September 30, 2019
Allowance for credit losses:
Balance at beginning of period $ 15,857 $ 28,034 $ 6,242 $ 965 $ 18,175 $ 599 $ 72 $ 69,944
Loans charged-off (1,799 ) (5,343 ) — — — — (2 ) (7,144 )
Recoveries of loans previously charged-off 377 302 2 3 52 — 38 774
Net loans (charged-off) recoveries (1,422 ) (5,041 ) 2 3 52 — 36 (6,370 )
Provision for credit losses 3,734 5,534 (646 ) 384 1,045 (24 ) 119 10,146
Ending balance $ 18,169 $ 28,527 $ 5,598 $ 1,352 $ 19,272 $ 575 $ 227 $ 73,720

As of September 30, 2019
Allowance for credit losses:
Individually evaluated for impairment $ 8,196 $ 1,200 $ 375 $ 650 $ — $ 13 $ — $ 10,434
Collectively evaluated for impairment 9,973 27,327 5,223 702 19,272 562 227 63,286
Ending balance $ 18,169 $ 28,527 $ 5,598 $ 1,352 $ 19,272 $ 575 $ 227 $ 73,720

Three Months Ended September 30, 2018
Allowance for credit losses:
Balance at beginning of period $ 12,206 $ 27,988 $ 6,003 $ 757 $ 18,651 $ 673 $ 331 $ 66,609
Loans charged-off (1,174 ) — — — (643 ) — (15 ) (1,832 )
Recoveries of loans previously charged-off 60 — — 1 899 6 5 971
Net loans (charged-off) recoveries (1,114 ) — — 1 256 6 (10 ) (861 )
Provision for credit losses 4,557 (601 ) (72 ) (9 ) (1,368 ) (48 ) (18 ) 2,441
Ending balance $ 15,649 $ 27,387 $ 5,931 $ 749 $ 17,539 $ 631 $ 303 $ 68,189

Nine Months Ended September 30, 2018
Allowance for credit losses:
Balance at beginning of period $ 13,102 $ 25,376 $ 5,934 $ 944 $ 18,492 $ 770 $ 140 $ 64,758
Loans charged-off (2,435 ) (121 ) (132 ) — (1,160 ) — (15 ) (3,863 )
Recoveries of loans previously charged-off 86 2 2 4 994 133 13 1,234
Net loans (charged-off) recoveries (2,349 ) (119 ) (130 ) 4 (166 ) 133 (2 ) (2,629 )
Provision for credit losses 4,896 2,130 127 (199 ) (787 ) (272 ) 165 6,060
Ending balance $ 15,649 $ 27,387 $ 5,931 $ 749 $ 17,539 $ 631 $ 303 $ 68,189

As of September 30, 2018
Allowance for credit losses:
Individually evaluated for impairment $ 6,271 $ 3,043 $ 500 $ — $ — $ — $ 56 $ 9,870
Collectively evaluated for impairment 9,378 24,344 5,431 749 17,539 631 247 58,319
Ending balance $ 15,649 $ 27,387 $ 5,931 $ 749 $ 17,539 $ 631 $ 303 $ 68,189

16During the first quarter of 2020, we adopted ASU 2016-13, which replaced the incurred loss methodology for determining our provision for credit losses and allowance for credit losses with an expected loss methodology that is referred to as the CECL model. Upon adoption, the allowance for credit losses was increased by $14.7 million, which included a $4.1 million increase to the allowance for unfunded commitments, with no impact to the consolidated statement of operations. We recorded a $19.7 million and $34.0 million provision for credit losses for the three and six months ended second June 30, 2020 under CECL. We recorded $7.1 million and $9.4 million in net charge-offs during the three and six months ended June 30, 2020, respectively, compared to $1.5 million and $4.8 million during the three and six months ended June 30, 2019.

Table of Contents

A loan is considered collateral-dependent when the borrower is experiencing financial difficulty and repayment is expected to be provided substantially through the operation or sale of the collateral.

The ~~Company’s recorded investments in~~following table presents the amortized cost basis of collateral-dependent loans by class of loans as of ~~September~~June 30, ~~2019 and December 31, 2018 related to each balance in the allowance for loan losses by portfolio segment and disaggregated on the basis of the Company’s impairment methodology was as follows:~~2020:


	Business/Other
(dollars in thousands)	Assets		Real Estate
Commercial	$	15,105	$	2,895
Income producing - commercial real estate		3,193		24,102
Owner occupied - commercial real estate		—		10,815
Real estate mortgage - residential		—		7,960
Construction - commercial and residential		—		5,385
Construction - C&I (owner occupied)		—		—
Home equity		—		600
Other consumer		6		—
Total	$	18,304	$	51,757

Income
Producing - Owner
Occupied - Real Estate Construction -
Commercial Commercial Mortgage - Commercial and Home Other
(dollars in thousands) Commercial Real Estate Real Estate Residential Residential Equity Consumer Total

September 30, 2019
Recorded investment in loans:
Individually evaluated for impairment $ 28,155 $ 39,089 $ 6,616 $ 5,365 $ 9,148 $ 750 $ — $ 89,123
Collectively evaluated for impairment 1,438,707 3,773,195 949,729 99,198 1,126,557 80,367 2,285 7,470,038
Ending balance $ 1,466,862 $ 3,812,284 $ 956,345 $ 104,563 $ 1,135,705 $ 81,117 $ 2,285 $ 7,559,161

December 31, 2018
Recorded investment in loans:
Individually evaluated for impairment $ 8,738 $ 61,747 $ 5,307 $ 1,228 $ 7,012 $ 487 $ — $ 84,519
Collectively evaluated for impairment 1,544,374 3,195,153 882,507 105,190 1,090,600 86,116 2,988 6,906,928
Ending balance $ 1,553,112 $ 3,256,900 $ 887,814 $ 106,418 $ 1,097,612 $ 86,603 $ 2,988 $ 6,991,447

Credit Quality Indicators

The Company uses several credit quality indicators to manage credit risk in an ongoing manner. The Company’s primary credit quality indicators are to use an internal credit risk rating system that categorizes loans into pass, watch, special mention, or classified categories. Credit risk ratings are applied individually to those classes of loans that have significant or unique credit characteristics that benefit from a case-by-case evaluation. These are typically loans to businesses or individuals in the classes which comprise the commercial portfolio segment. Groups of loans that are underwritten and structured using standardized criteria and characteristics, such as statistical models (e.g., credit scoring or payment performance), are typically risk rated and monitored collectively. These are typically loans to individuals in the classes which comprise the consumer portfolio segment.

Table of Contents

The following are the definitions of the Company’s credit quality indicators:

~~Pass:~~
Pass:	Loans in all classes that comprise the commercial and consumer portfolio segments that are not adversely rated, are contractually current as to principal and interest, and are otherwise in compliance with the contractual terms of the loan agreement. Management believes that there is a low likelihood of loss related to those loans that are considered pass.


Watch:	Loan paying as agreed with generally acceptable asset quality; however the obligor’s performance has not met expectations. Balance sheet and/or income statement has shown deterioration to the point that the obligor could not sustain any further setbacks. Credit is expected to be strengthened through improved obligor performance and/or additional collateral within a reasonable period of time.

Special Mention:

Loans in the classes that comprise the commercial portfolio segment that have potential weaknesses that deserve management’s close attention. If not addressed, these potential weaknesses may result in deterioration of the repayment prospects for the loan. The special mention credit quality indicator is not used for classes of loans that comprise the consumer portfolio segment. Management believes that there is a moderate likelihood of some loss related to those loans that are considered special mention.


Classified:	Classified (a) Substandard -– Loans inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the company will sustain some loss if the deficiencies are not corrected. Loss potential, while existing in the aggregate amount of substandard loans, does not have to exist in individual loans classified substandard.

	Classified (b) Doubtful – Loans that have all the weaknesses inherent in a loan classified substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. The possibility of loss is extremely high, but because of certain important and reasonably specific pending factors, which may work to the advantage and strengthening of the assets, its classification as an estimated loss is deferred until its more exact status may be determined.

~~Classified (b) Doubtful~~Table of Contents ~~- Loans that have all the weaknesses inherent in a loan classified substandard, with the added characteristic that the weaknesses make collection or liquidation in full,~~

Based on the ~~basis~~most recent analysis performed, the risk category of ~~currently existing facts, conditions,~~loans by class of loans and ~~values, highly questionable and improbable. The possibility~~year of ~~loss~~origination is ~~extremely high, but because of certain important and reasonably specific pending factors, which may work to the advantage and strengthening of the assets, its classification~~ as ~~an estimated loss is deferred until its more exact status may be determined.~~follows:


June 30, 2020 (dollars in thousands)	2016		2017		2018		2019		2020		Prior		Total
Commercial
Pass		128,724		316,829		275,852		227,726		140,233		439,707		1,529,071
Watch		362		16,583		—		2,275		—		18,743		37,963
Special Mention		—		—		10,977		—		—		933		11,910
Substandard		4,667		2,128		2,565		459		—		18,293		28,112
Total		133,753		335,540		289,394		230,460		140,233		477,676		1,607,056
PPP loans
Pass		—		—		—		—		456,476		—		456,476
Total		—		—		—		—		456,476		—		456,476
Income producing - commercial real estate
Pass		412,724		520,542		726,838		807,571		208,386		970,544		3,646,605
Watch		—		—		—		4,324		—		721		5,045
Special Mention		800		—		—		—		—		4,843		5,643
Substandard		—		4,656		4,883		5,542		—		6,572		21,653
Total		413,524		525,198		731,721		817,437		208,386		982,680		3,678,946
Owner occupied - commercial real estate
Pass		107,303		117,523		221,811		92,496		15,673		358,051		912,857
Watch		—		—		—		—		—		40,465		40,465
Substandard		803		—		360		—		—		9,592		10,755
Total		108,106		117,523		222,171		92,496		15,673		408,108		964,077
Real estate mortgage - residential
Pass		3,423		10,394		15,429		28,234		5,701		21,844		85,025
Watch		—		—		—		—		—		617		617
Substandard		4,154		2,619		—		—		—		1,186		7,959
Total		7,577		13,013		15,429		28,234		5,701		23,647		93,601
Construction - commercial and residential
Pass		71,957		431,635		317,131		108,584		25,385		35,473		990,165
Substandard		2,298		408		—		—		—		2,679		5,385
Total		74,255		432,043		317,131		108,584		25,385		38,152		995,550
Construction - C&I (owner occupied)
Pass		11,689		5,482		41,084		27,557		17,441		32,612		135,865
Watch		—		2,124		11,087		—		—		769		13,980
Total		11,689		7,606		52,171		27,557		17,441		33,381		149,845
Home Equity
Pass		4,859		8,942		8,658		4,468		3,785		42,416		73,128
Watch		—		—		—		—		—		944		944
Substandard		—		—		—		—		—		849		849
Total		4,859		8,942		8,658		4,468		3,785		44,209		74,921
Other Consumer
Pass		177		85		121		106		28		764		1,281
Substandard		—		—		—		—		—		8		8
Total		177		85		121		106		28		772		1,289
Total Recorded Investment	$	753,940	$	1,439,950	$	1,636,796	$	1,309,342	$	873,108	$	2,008,625	$	8,021,761

The Company’s credit quality indicators are generally updated ~~generally on a quarterly basis, but no less frequently than annually.~~

annually; however, credits rated watch or below are reviewed more frequently. The following table presents by class and by credit quality indicator, the recorded investment in the Company’s loans and leases as of ~~September 30, 2019 and~~ December 31, ~~2018.~~2019:

			Watch and						Total

																					Total
(dollars in thousands)	Pass		Special Mention		Substandard		Doubtful		Loans		Pass		Watch		Special Mention		Substandard		Doubtful		Loans

September 30, 2019
December 31, 2019
Commercial	$	1,392,189	$	46,518	$	28,155	$	—	$	1,466,862	$	1,470,636	$	38,522	$	11,460	$	25,288	$	—	$	1,545,906
Income producing - commercial real estate		3,662,436		110,759		39,089		—		3,812,284		3,667,585		16,069		—		19,093		—		3,702,747
Owner occupied - commercial real estate		892,720		57,009		6,616		—		956,345		925,800		53,146		—		6,463		—		985,409
Real estate mortgage – residential		98,564		634		5,365		—		104,563
Real estate mortgage - residential												98,228		628		—		5,365		—		104,221
Construction - commercial and residential		1,126,557		—		9,148		—		1,135,705		1,113,734		—		—		11,510		—		1,125,244
Home equity		79,681		686		750		—		81,117		78,626		948		—		487		—		80,061
Other consumer		2,285		—		—		—		2,285		2,160		—		—		—		—		2,160
Total	$	7,254,432	$	215,606	$	89,123	$	—	$	7,559,161	$	7,356,769	$	109,313	$	11,460	$	68,206	$	—	$	7,545,748

December 31, 2018
Commercial	$	1,505,477	$	25,584	$	22,051	$	—	$	1,553,112
Income producing - commercial real estate		3,172,479		1,536		82,885		—		3,256,900
Owner occupied - commercial real estate		844,286		38,221		5,307		—		887,814
Real estate mortgage – residential		104,543		647		1,228		—		106,418
Construction - commercial and residential		1,090,600		—		7,012		—		1,097,612
Home equity		85,434		682		487		—		86,603
Other consumer		2,988		—		—		—		2,988
Total	$	6,805,807	$	66,670	$	118,970	$	—	$	6,991,447

Table of Contents

Nonaccrual and Past Due Loans

~~Loans~~As part of its comprehensive loan review process, the Loan Committee or Credit Review Committee carefully evaluate loans which are ~~considered past due if the required principal and interest payments have not been received as~~past-due 30 days or more. The Committees make a thorough assessment of the date such payments were due. Loans are placed on nonaccrual status when, in management’s opinion, the borrower may be unable to meet payment obligations as they become due, as well as when required by regulatory provisions. Loans mayconditions and circumstances surrounding each delinquent loan. The Bank’s loan policy requires that loans be placed on nonaccrual if they are ninety days past-due, unless they are well secured and in the process of collection. Additionally, Credit Administration specifically analyzes the status ~~regardless~~ of ~~whether or not such loans are considered past due. Interest income is subsequently recognized only~~development and construction projects, sales activities and utilization of interest reserves in order to ~~the extent cash payments are received in excess~~carefully and prudently assess potential increased levels of ~~principal due. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.~~risk requiring additional reserves.

The following table presents, by class of loan, ~~information related to~~an aging analysis and the recorded investments in loans past due as of June 30, 2020 and December 31, 2019:


	Loans		Loans		Loans								Total Recorded
	30-59 Days		60-89 Days		90 Days or		Total Past		Current				Investment in
(dollars in thousands)	Past Due		Past Due		More Past Due		Due Loans		Loans		Non-Accrual		Loans
June 30, 2020
Commercial	$	603	$	3,046	$	—	$	3,649	$	1,586,686	$	16,721	$	1,607,056
PPP loans		—		—		—		—		456,476		—	$	456,476
Income producing - commercial real estate		—		14,203		—		14,203		3,647,464		17,279		3,678,946
Owner occupied - commercial real estate		542		212		—		754		952,568		10,755		964,077
Real estate mortgage - residential		—		—		—		—		85,385		8,216		93,601
Construction - commercial and residential		—		751		—		751		989,414		5,385		995,550
Construction - C&I (owner occupied)		—		—		—		—		149,845		—		149,845
Home equity		263		254		—		517		73,804		600		74,921
Other consumer		—		3		—		3		1,280		6		1,289
Total	$	1,408	$	18,469	$	—	$	19,877	$	7,942,922	$	58,962	$	8,021,761

December 31, 2019
Commercial	$	3,063	$	781	$	—	$	3,844	$	1,527,134	$	14,928	$	1,545,906
Income producing - commercial real estate		—		5,542		—		5,542		3,687,494		9,711		3,702,747
Owner occupied - commercial real estate		13,008		—		—		13,008		965,938		6,463		985,409
Real estate mortgage – residential		3,533		—		—		3,533		95,057		5,631		104,221
Construction - commercial and residential		—		—		—		—		1,113,735		11,509		1,125,244
Home equity		136		192		—		328		79,246		487		80,061
Other consumer		—		9		—		9		2,151		—		2,160
Total	$	19,740	$	6,524	$	—	$	26,264	$	7,470,755	$	48,729	$	7,545,748

The following presents the nonaccrual loans as of ~~September~~June 30, ~~2019~~2020 and December 31, ~~2018.~~2019:

(dollars in thousands) September 30,
2019 December 31,
2018

  Commercial $ 16,074 $ 7,115
  Income producing - commercial real estate 5,654 1,766
  Owner occupied - commercial real estate 4,124 2,368
  Real estate mortgage - residential 5,635 1,510
  Construction - commercial and residential 9,148 3,031
  Home equity 487 487
  Total nonaccrual loans (1)(2) $ 41,122 $ 16,277


	June 30, 2020						December 31, 2019
	Nonaccrual with		Nonaccrual with		Total		Total
	No Allowance		an Allowance		Nonaccrual		Nonaccrual
(dollars in thousands)	for Credit Loss		for Credit Loss		Loans		Loans

Commercial		1,507		15,214		16,721		14,928
PPP loans		—		—		—		—
Income producing - commercial real estate		8,544		8,735		17,279		9,711
Owner occupied - commercial real estate		7,065		3,690		10,755		6,463
Real estate mortgage - residential		5,503		2,713		8,216		5,631
Construction - commercial and residential		2,298		3,087		5,385		11,509
Home equity		50		550		600		487
Other consumer		—		6		6		—
Total	$	24,967	$	33,995	$	58,962	$	48,729

(1)

Excludes ~~troubled debt restructurings (“TDRs”)~~TDRs that were performing under their restructured terms totaling $~~8.6~~$12.3 millionat ~~September~~June 30, ~~2019~~2020 and $~~24.0~~$16.6 million at December 31, ~~2018.~~2019.

(2)

Gross interest income of $~~2.7~~$1.7 million and $~~707 thousand~~$1.2 million would have been recorded for the ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 and ~~2018,~~2019, respectively, if nonaccrual loans shown above had been current and in accordance with their original terms, while the interest actually recorded on such loans was $~~598~~$57 thousand and $~~193~~$86 thousand for the ~~nine~~six months ended ~~September~~June 30, 2020 and 2019, ~~and 2018,~~ respectively.

Table of Contents

See Note 1 to the Consolidated Financial Statements for a description of the Company’s policy for placing loans on nonaccrual status.

Pre Adoption of CECL

~~The following table presents, by class of loan, an aging analysis and the recorded investments in loans past due as of September 30, 2019 and December 31, 2018.~~

Loans Loans Loans Total Recorded
30-59 Days 60-89 Days 90 Days or Total Past Current Investment in
(dollars in thousands) Past Due Past Due More Past Due Due Loans Loans Loans

September 30, 2019
Commercial $ 4,639 $ 3,509 $ 16,074 $ 24,222 $ 1,442,640 $ 1,466,862
Income producing - commercial real estate 21,737 22,190 5,654 66,109 3,746,175 3,812,284
Owner occupied - commercial real estate 3,626 21,768 4,124 29,518 926,827 956,345
Real estate mortgage – residential 634 — 5,635 6,269 98,294 104,563
Construction - commercial and residential — 1,866 9,148 11,014 1,124,691 1,135,705
Home equity 86 130 487 703 80,414 81,117
Other consumer 13 8 — 21 2,264 2,285
Total $ 30,735 $ 49,471 $ 41,122 $ 137,856 $ 7,421,305 $ 7,559,161

December 31, 2018
Commercial $ 4,535 $ 2,870 $ 7,115 $ 14,520 $ 1,538,592 $ 1,553,112
Income producing - commercial real estate 5,855 27,479 1,766 35,100 3,221,800 3,256,900
Owner occupied - commercial real estate 5,051 2,370 2,368 9,789 878,025 887,814
Real estate mortgage – residential 2,456 1,698 1,510 5,664 100,754 106,418
Construction - commercial and residential 4,392 — 3,031 7,423 1,090,189 1,097,612
Home equity 630 47 487 1,164 85,439 86,603
Other consumer — — — — 2,988 2,988
Total $ 22,919 $ 34,464 $ 16,277 $ 73,660 $ 6,917,787 $ 6,991,447

~~Impaired Loans~~

Loans ~~are~~were considered impaired when, based on current information and events, it iswas probable the Company ~~will~~would be unable to collect all amounts due in accordance with the original contractual terms of the loan agreement, including scheduled principal and interest payments. ~~Impairment is evaluated in total for smaller-balance loans of a similar nature and on an individual loan basis for other loans.~~ If a loan iswas impaired, a specific valuation allowance iswas allocated, if necessary, so that the loan iswas reported ~~net,~~ at the present value of estimated future cash flows using the loan’s existing rate or at the fair value of collateral if repayment iswas expected solely from the collateral. ~~Interest payments~~The Bank’s loan policy requires that loans be placed on ~~impaired loans~~nonaccrual if they are ~~typically applied to principal~~ninety days past-due, unless ~~collectability~~they are well secured and in the process of ~~the principal amount is reasonably assured, in which case interest is recognized on a cash basis.~~collection. Impaired loans, or portions thereof, ~~are~~were charged-off when deemed uncollectible.

The following table presents, by class of loan, information related to impaired loans ~~for the periods ended September 30, 2019 and~~at December 31, ~~2018.~~2019:


	Unpaid		Recorded		Recorded						Average Recorded		Interest Income
	Contractual		Investment		Investment		Total				Investment		Recognized
	Principal		With No		With		Recorded		Related		Year		Year
(dollars in thousands)	Balance		Allowance		Allowance		Investment		Allowance		To Date		To Date
December 31, 2019
Commercial	$	15,814	$	11,858	$	3,956	$	15,814	$	5,714	$	15,682	$	270
Income producing - commercial real estate		14,093		2,713		11,380		14,093		2,145		18,133		382
Owner occupied - commercial real estate		7,349		6,388		961		7,349		415		6,107		197
Real estate mortgage - residential		5,631		3,175		2,456		5,631		650		5,638		—
Construction - commercial and residential		11,509		11,101		408		11,509		100		8,211		92
Home equity		487		—		487		487		100		487		—
Other consumer		—		—		—		—		—		—		—
Total	$	54,883	$	35,235	$	19,648	$	54,883	$	9,124	$	54,258	$	941

Unpaid Recorded Recorded
Contractual Investment Investment Total Average Recorded Investment Interest Income Recognized
Principal With No With Recorded Related Quarter Year Quarter Year
(dollars in thousands) Balance Allowance Allowance Investment Allowance To Date To Date To Date To Date

September 30, 2019
Commercial $ 18,243 $ 5,641 $ 11,331 $ 16,972 $ 8,196 $ 16,967 $ 15,638 $ 117 $ 220
Income producing - commercial real estate 10,041 1,853 8,188 10,041 1,200 9,497 19,479 412 510
Owner occupied - commercial real estate 7,407 6,630 777 7,407 375 6,113 5,693 120 213
Real estate mortgage – residential 5,635 3,179 2,456 5,635 650 5,638 5,640 — —
Construction - commercial and residential 10,308 9,148 — 9,148 — 9,152 7,111 — 15
Home equity 487 487 — 487 13 487 487 — —
Other consumer — — — — — — — — —
Total $ 52,121 $ 26,938 $ 22,752 $ 49,690 $ 10,434 $ 47,854 $ 54,048 $ 649 $ 958

December 31, 2018
Commercial $ 8,613 $ 2,057 $ 6,084 $ 8,141 $ 4,803 $ 10,306 $ 8,359 $ (126 ) $ 190
Income producing - commercial real estate 21,402 1,720 19,682 21,402 2,465 15,331 12,309 189 550
Owner occupied - commercial real estate 5,731 4,361 1,370 5,731 600 5,746 6,011 47 196
Real estate mortgage – residential 1,510 1,510 — 1,510 — 1,516 1,688 — 2
Construction - commercial and residential 3,031 3,031 — 3,031 1,050 3,031 2,028 — 68
Home equity 487 487 — 487 — 487 491 — —
Other consumer — — — — — 46 69 — —
Total $ 40,774 $ 13,166 $ 27,136 $ 40,302 $ 8,918 $ 36,463 $ 30,955 $ 110 $ 1,006

Modifications

A modification of a loan constitutes a TDR when a borrower is experiencing financial difficulty and the modification constitutes a concession. The Company offers various types of concessions when modifying a loan. Commercial and industrial loans modified in a TDR often involve temporary interest-only payments, term extensions, and converting revolving credit lines to term loans. Additional collateral, a co-borrower, or a guarantor is often requested. ~~Commercial mortgage and construction loans modified~~The most common change in ~~a TDR often involve reducing~~terms provided by the ~~interest rate for the remaining term~~Company is an extension of ~~the loan, extending the maturity date at~~ an interest rate lower than the current market rate for new debt with similar risk, or substituting or adding a new borrower or guarantor. Construction loans modified in a TDR may also involve extending the interest-only payment period.only term. As of ~~September~~June 30, ~~2019,~~2020, all performing TDRs were categorized as interest-only ~~modifications.~~modifications.

Loans modified in a TDR for the Company may have the financial effect of increasing the specific allowance associated with the loan. An allowance for impaired consumer and commercial loans that have been modified in a TDR is measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s observable market price, or the estimated fair value of the collateral, less any selling costs, if the loan is collateral dependent. Management exercises significant judgment in developing these estimates.

21In response to the COVID-19 pandemic and its economic impact to our customers, we implemented a short-term modification program that complies with the CARES Act and ASC 310-40 to provide temporary payment relief to those borrowers directly impacted by COVID-19 who were not more than 30 days past due as of December 31, 2019. This program allows for a deferral of payments for 90 days, which we may extend for an additional 90 days, for a maximum of 180 days on a cumulative and successive basis. The deferred payments along with interest accrued during the deferral period are due and payable on the maturity date. As of June 30, 2020, we granted temporary modifications on approximately 708 loans representing approximately $1.63 billion (20% of total loans) in outstanding exposure. Some of these deferrals may not have met the criteria for treatment under U.S. GAAP as TDR. Additionally, none of the deferrals are reflected in the Company's asset quality measures (i.e. non-performing loans) due to the provision of the CARES Act that permits U.S. financial institutions to temporarily suspend the U.S. GAAP requirements to treat such short-term loan modifications as TDR. Similar provisions have also been confirmed by interagency guidance issued by the federal banking agencies and confirmed with staff members of the Financial Accounting Standards Board.

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The following table presents by class, the recorded investment of loans modified in TDRs held by the Company for the periods ended ~~September~~June 30, ~~2019~~2020 and ~~2018.~~2019.


	For the Six Months Ended June 30, 2020
					Income		Owner
	Number				Producing -		Occupied -		Construction -
	of				Commercial		Commercial		Commercial
(dollars in thousands)	Contracts		Commercial		Real Estate		Real Estate		Real Estate		Total
Troubled debt restructurings
Restructured accruing		10	$	1,420	$	10,016	$	836	$	—	$	12,272
Restructured nonaccruing		3		138		5,542		2,370		—		8,050
Total		13	$	1,558	$	15,558	$	3,206	$	—	$	20,322

Specific allowance			$	257	$	1,295	$	—	$	—	$	1,552

Restructured and subsequently defaulted			$	138	$	5,542	$	2,370	$	—	$	8,050


	For the Six Months Ended June 30, 2019
					Income		Owner
	Number				Producing -		Occupied -		Construction -
	of				Commercial		Commercial		Commercial
(dollars in thousands)	Contracts		Commercial		Real Estate		Real Estate		Real Estate		Total
Troubled debt restructurings
Restructured accruing		7	$	909	$	4,390	$	3,309	$	—	$	8,608
Restructured nonaccruing		4		2,831		—		—		—		2,831
Total		11	$	3,740	$	4,390	$	3,309	$	—	$	11,439

Specific allowance			$	—	$	1,000	$	—	$	—	$	1,000

Restructured and subsequently defaulted			$	—	$	2,300	$	—	$	—	$	2,300

For the nine months Ended September 30, 2019
Number of Income Producing - Owner Occupied - Construction -
(dollars in thousands) Contracts Commercial Commercial Real Estate Commercial Real Estate Commercial Real Estate Total
Troubled debt restructurings
     Restructured accruing 7 $ 898 $ 4,387 $ 3,283 $ — $ 8,568
     Restructured nonaccruing 3 1,521 — — — 1,521
Total 10 $ 2,419 $ 4,387 $ 3,283 $ — $ 10,089

Specific allowance $ — $ 1,000 $ — $ — $ 1,000

Restructured and subsequently defaulted $ $ 2,300 $ — $ — $ 2,300

For the nine months Ended September 30, 2018
Number of Income Producing - Owner Occupied - Construction -
(dollars in thousands) Contracts Commercial Commercial Real Estate Commercial Real Estate Commercial Real Estate Total
Troubled debt restructurings
     Restructured accruing 10 $ 4,942 $ 9,212 $ 3,391 $ — $ 17,545
     Restructured nonaccruing 4 723 — — — 723
Total 14 $ 5,665 $ 9,212 $ 3,391 $ — $ 18,268

Specific allowance $ 2,000 $ 3,500 $ — $ — $ 5,500

Restructured and subsequently defaulted $ — $ 937 $ — $ — $ 937

The Company had 1013 TDR’s at ~~September~~June 30, ~~2019~~2020 totaling approximately $~~10.1 million~~. $20.3 million. NaN of these loans totaling approximately $~~8.6~~$12.3 millionare performing under their modified terms. ~~There~~For both the first six months of 2020 and 2019, there was 1performing TDR loan, totaling $~~2.3~~$5.5 million and $2.3 million, respectively, that defaulted on its modified ~~terms which was reclassified to nonperforming loans during the nine months ended September 30, 2019. During the nine months ended September 30, 2018, there were~~ 2~~performing TDRs totaling $937 thousandthat defaulted on their modified terms which were reclassified to nonperforming loans.~~terms. A default is considered to have occurred once the TDR is past due 90 days or more or it has been placed on ~~nonaccrual.~~non-accrual status. For the three months ended ~~September~~June 30, 2020, there were 2 restructured loans totaling approximately $870 thousand where the collateral was sold and the loans paid in full, as compared to the same period in 2019, when there was 1 restructured loan totaling approximately $4.8 million that had its collateral property sold for approximately $3 million and the remaining $1.8 million charged-off during the quarter. During the three months ended June 30, 2020, 0 loans were re-underwritten and removed from TDR status, as compared to the three months ended June 30, 2019, there was 1~~restructured~~ loan totaling ~~approximately $309 thousand~~$10.4 million that was ~~paid off from~~re-underwritten into 2 new loans which provided better collateral for the ~~sale proceeds of the collateral property.~~Bank. Commercial and consumer loans modified in a TDR are closely monitored for delinquency as an early indicator of possible future default. If loans modified in a TDR subsequently default, the Company evaluates the loan for possible further impairment. The allowance may be increased, adjustments may be made in the allocation of the allowance or partial charge-offs may be taken to further write-down the carrying value of the loan. For both the three months ended ~~September~~June 30, 2020 and 2019, there were no loans modified in a ~~TDR, as compared to the three months ended September 30, 2018 which had~~ 1~~loan totaling $2.4 million~~ ~~modified in a~~ TDR.

Note 6. Leases

A lease is defined as a contract that conveys the right to control the use of identified property, plant or equipment for a period of time in exchange for consideration. On January 1, 2019, the Company adopted ASU No. 2016-02 “Leases” (Topic 842) and has adopted all subsequent ASUs that modified Topic 842. For the Company, Topic 842 primarily affected the accounting treatment for operating lease agreements in which the Company is the lessee.

Substantially all of the leases in which the Company is the lessee are comprised of real estate property for branch offices, ATM locations, and corporate office space. Substantially all of our leases are classified as operating leases, and as such, were previously not recognized on the Company’s ~~consolidated statements~~Consolidated Statements of ~~condition.~~Condition. With the adoption of Topic 842, operating lease agreements were

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required to be recognized on the ~~consolidated statements~~Consolidated Statements of ~~condition~~Condition as a right-of-use (“ROU”) asset and a corresponding lease liability.

As of ~~September~~June 30, ~~2019,~~2020, the Company had $~~26.6~~$25.4 million of operating lease ROU assets and $~~29.6~~$27.1 million of operating lease liabilities on the Company’s Consolidated Balance Sheet. As of December 31, 2019, the Company had $27.4 million of operating lease ROU assets and $30.0 million of operating lease liabilities on the Company’s Consolidated Balance Sheet. The Company elects not to recognize ROU assets and lease liabilities arising from short-term leases, leases with initial terms of twelve months or less, or equipment leases (deemed immaterial) on the Consolidated Statements of Condition.

Our leases contain terms and conditions of options to extend or terminate the lease which are recognized as part of the ROU assets and lease liabilities when an economic benefit to exercise the option exists and there is a 90%90% probability that the Company will exercise the option. If these criteria are not met, the options are not included in our ROU assets and lease liabilities.

As of ~~September~~June 30, ~~2019,~~2020, our leases do not contain material residual value guarantees or impose restrictions or covenants related to dividends or the Company’s ability to incur additional financial obligations. As of ~~September~~June 30, ~~2019,~~2020, there were no0 leases that have been signed but did not yet commence as of the reporting date that create significant rights and obligations for the Company.

The following table presents lease costs and other lease information.


	Six Months Ended
(dollars in thousands)	June 30, 2020			June 30,2019
Lease Cost
Operating Lease Cost (Cost resulting from lease payments)	$	4,005		$	3,898
Variable Lease Cost (Cost excluded from lease payments)		518			535
Sublease Income		(174)			(188)
Net Lease Cost	$	4,349		$	4,245

Operating Lease - Operating Cash Flows (Fixed Payments)		4,419			4,246
Right-of-Use Assets - Operating Leases		25,368			28,214
Weighted Average Lease Term - Operating Leases		4.62	yrs		5.59	yrs
Weighted Average Discount Rate - Operating Leases		4.00%			4.00%

Nine Months Ended
(dollars in thousands) September 30, 2019
Lease Cost
Operating Lease Cost (Cost resulting from lease payments) $ 5,857
Variable Lease Cost (Cost excluded from lease payments) 815
Sublease Income (282 )
Net Lease Cost $ 6,390

Operating Lease - Operating Cash Flows (Fixed Payments) $ 6,382
Operating Lease - Operating Cash Flows (Liability Reduction) 5,458
Right-of-Use Assets - Operating Leases 26,552
Weighted Average Lease Term - Operating Leases 5.11 years
Weighted Average Discount Rate - Operating Leases 4.00 %

Future minimum payments for operating leases with initial or remaining terms of more than one year ~~or more~~ as of ~~September~~June 30, ~~2019~~2020 were as follows:


(dollars in thousands)
Twelve Months Ended:
June 30, 2021	$	8,531
June 30, 2022		6,745
June 30, 2023		4,707
June 30, 2024		4,107
June 30, 2025		2,997
Thereafter		2,547
Total Future Minimum Lease Payments		29,634
Amounts Representing Interest		(2,497)
Present Value of Net Future Minimum Lease Payments	$	27,137

(dollars in thousands)
Twelve Months Ended:
September 30, 2020 $ 8,532
September 30, 2021 7,857
September 30, 2022 5,868
September 30, 2023 4,379
September 30, 2024 3,663
Thereafter 4,327
Total Future Minimum Lease Payments 34,626
Amounts Representing Interest (5,040 )
Present Value of Net Future Minimum Lease Payments $ 29,586

Note 7. ~~Affordable Housing Projects Tax Credit Partnerships~~

Included in Other Assets, the Company makes equity investments in various limited partnerships that sponsor affordable housing projects utilizing the Low Income Housing Tax Credit (“LIHTC”) pursuant to Section 42 of the Internal Revenue Code. The purpose of these investments is to achieve a satisfactory return on capital, to facilitate the sale of affordable housing products offerings, and to assist in achieving goals associated with the Community Reinvestment Act. The primary activities of the limited partnerships include the identification, development, and operation of multi-family housing that is leased to qualifying residential tenants. Generally, these types of investments are funded through a combination of debt and equity.

The Company is a limited partner in each LIHTC limited partnership. Each limited partnership is managed by an unrelated third party general partner who exercises significant control over the affairs of the limited partnership. The general partner has all the rights, powers and authority granted or permitted to be granted to a general partner of a limited partnership. Duties entrusted to the general partner of each limited partnership include, but are not limited to: investment in operating companies, company expenditures, investment of excess funds, borrowing funds, employment of agents, disposition of fund property, prepayment and refinancing of liabilities, votes and consents, contract authority, disbursement of funds, accounting methods, tax elections, bank accounts, insurance, litigation, cash reserve, and use of working capital reserve funds. Except for limited rights granted to the limited partner(s) relating to the approval of certain transactions, the limited partner(s) may not participate in the operation, management, or control of the limited partnership’s business, transact any business in the limited partnership’s name or have any power to sign documents for or otherwise bind the limited partnership. In addition, the general partner may only be removed by the limited partner(s) in the event the general partner fails to comply with the terms of the agreement or is negligent in performing its duties.

The general partner of each limited partnership has both the power to direct the activities which most significantly affect the performance of each partnership and the obligation to absorb losses or the right to receive benefits that could be significant to the entities. Therefore, the Company has determined that it is not the primary beneficiary of any LIHTC partnership. The Company accounts for its affordable housing tax credit investments using the proportional amortization method. The Company’s net affordable housing tax credit investments were $~~28.0~~ ~~million and related unfunded commitments were $11.0~~ million as of September 30, 2019 and are included in Other Assets and Other Liabilities in the Consolidated Statements of Condition. The Company’s net affordable housing tax credit investments were $~~28.2~~ ~~million and related unfunded commitments were $15.0~~ ~~million as of December 31, 2018.~~

~~Note 8.~~ Other Derivatives

The Company is exposed to certain ~~risk~~risks arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, liquidity, and credit risk primarily by managing the amount, sources, and duration of its assets and liabilities and the use of derivative financial instruments.

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Cash Flow Hedges of Interest Rate Risk

The Company uses interest rate swap agreements to assist in its interest rate risk management. The Company’s objective in using interest rate derivatives designated as cash flow hedges is to add stability to interest expense and to better manage its exposure to interest rate movements. To accomplish this objective, the Company utilizes interest rate swaps as part of its interest rate risk management strategy intended to mitigate the potential risk of rising interest rates on the Bank’s cost of funds. The notional amounts of the interest rate swaps designated as cash flow hedges do not represent amounts exchanged by the counterparties, but rather, the notional amount is used to determine, along with other terms of the derivative, the amounts to be exchanged between the counterparties. The interest rate swaps are designated as cash flow hedges and involve the receipt of variable rate amounts from one counterparty in exchange for the Company making fixed payments. The Company’s intent is to hedge its exposure to the variability in potential future interest rate conditions on existing financial instruments.

For derivatives designated as cash flow hedges, changes in the fair value of the derivative are initially reported in other comprehensive income (outside of earnings), net of tax, and subsequently reclassified to earnings when the hedged transaction affects earnings. The Company assesses the effectiveness of each hedging relationship by comparing the changes in cash flows of the derivative hedging instrument with the changes in cash flows of the designated hedged transactions.

As of ~~September~~June 30, 2020 and December 31, 2019, the Company had one designated cash flow hedge notional interest rate swap transaction outstanding amounting to $~~100~~$100 million~~associated with the Company’s variable rate deposits, as compared to three designated cash flow hedge notional interest rate swap transactions outstanding as of December 31, 2018 amounting to $250 million~~associated with the Company’s variable rate deposits. The ~~decline~~Company recognized $829 thousand in ~~the amount of hedged variable rate deposits was due to a reduction in such variable rate deposits. The net unrealized loss before~~noninterest income ~~tax on the swap was $362 thousandat September 30,~~during March 2019 ~~compared to a net unrealized gain before income tax of $3.7 millionat December 31, 2018. The unrealized loss in value since year end 2018 was~~ due to the termination of two of ~~the~~its interest rate swap transactions as part of the Company’s asset liability strategy as well as declines in market interest rates. ~~As a result of the swap terminations, the Company recognized $829 thousandin noninterest income during March 2019. Additionally, the Company will amortize $248 thousandof realized gain as a reduction to interest expense through the swap’s original maturity date of March 31, 2020.~~

Amounts reported in accumulated other comprehensive income related to designated cash flow hedge derivatives will be reclassified to interest income/expense as interest payments are made/received on the Company’s variable-rate assets/liabilities. During the ~~quarter ended September 30, 2019, the Company reclassified $264 thousand~~ ~~related to designated cash flow hedge derivatives from accumulated other comprehensive income to decrease interest expense. During the~~ next twelve months, the Company estimates (based on existing interest rates) that $~~134 thousand~~$1.3 million will be reclassified as an increase in interest expense.

Non-designated Hedges

Derivatives not designated as hedges are not speculative and result from a service the Company provides to certain customers. The Company executes interest rate caps and swaps with commercial banking customers to facilitate their respective risk management strategies. Those interest rate swaps are simultaneously hedged by offsetting derivatives that the Company executes with a third party, such that the Company minimizes its net risk exposure resulting from such transactions. As the interest rate derivatives associated with this program do not meet the strict hedge accounting requirements, changes in the fair value of both the customer derivatives and the offsetting derivatives are recognized directly in earnings.

The Company entered into credit risk participation agreements ~~(“RPAs”~~("RPAs") with institutional counterparties, under which the Company assumes its pro-rata share of the credit exposure associated with a ~~borrower’s~~borrower's performance related to interest rate derivative contracts. The fair value of RPAs is calculated by determining the total expected asset or liability exposure of the derivatives to the borrowers and applying the ~~borrowers’~~borrowers' credit spread to that exposure. Total expected exposure incorporates both the current and potential future exposure of the derivatives, derived from using observable inputs, such as yield curves and volatilities.

Credit-risk-related Contingent Features

The Company has agreements with each of its derivative counterparties that contain a provision where if the Company defaults on any of its indebtedness, then the Company could also be declared in default on its derivative obligations.

The Company is exposed to credit risk in the event of nonperformance by the interest rate derivative counterparty. The Company minimizes this risk by entering into derivative contracts with only large, stable financial institutions, and the Company has not experienced, and does not expect, any losses from counterparty nonperformance on the interest rate derivatives. The Company monitors counterparty risk in accordance with the provisions of ASC Topic 815, “"Derivatives and Hedging.”" In addition, the interest rate derivative agreements contain language outlining collateral-pledging requirements for each counterparty. Collateral must be posted when the market value exceeds certain threshold limits.

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The interest rate derivative agreements detail: 1) that collateral be posted when the market value exceeds certain threshold limits associated with the secured party’s exposure; 2) if the Company defaults on any of its indebtedness (including default where repayment of the indebtedness has not been accelerated by the lender), then the Company could also be declared in default on its derivative obligations; 3) if the Company fails to maintain its status as a ~~well capitalized~~well-capitalized institution then the counterparty could terminate the derivative positions and the Company would be required to settle its obligations under the agreements.

As of ~~September~~June 30, ~~2019,~~2020, the aggregate fair value of the derivative ~~contracts~~contract with credit risk contingent features (i.e., containing collateral posting or termination provisions based on our capital status) that was in a net liability position totaled $~~362 thousand~~.$6.1 million. The Company has a minimum collateral posting threshold with its derivative counterparty. As of ~~September~~June 30, ~~2019,~~2020, the Company was ~~not~~ required to post collateral totaling $1.9 million with its derivative counterparty against its obligations under this agreement. If the Company had breached any provisions under the agreement at ~~September~~June 30, ~~2019,~~2020, it could have been required to settle its obligations under the agreement at the termination value.

The table below identifies the balance sheet category and fair value of the Company’s designated cash flow hedge derivative instruments and non-designated hedges as of ~~September~~June 30, ~~2019~~2020 (unaudited) and December 31, ~~2018.~~

September 30, 2019 December 31, 2018
Notional Balance Sheet Notional Balance Sheet
Amount Fair Value Category Amount Fair Value Category

Derivatives designated as hedging instruments

(dollars in thousands)
Interest rate product $ —   $ —   Other Assets $ 250,000 $ 3,727 Other Assets

(dollars in thousands)
Interest rate product $ 100,000 $ 348 Other Liabilities $ —   $ —   Other Liabilities

Derivatives not designated as hedging instruments

(dollars in thousands)
Interest rate product $ 26,000 $ 15
Interest rate product 26,517 213
Interest rate product $ 52,517 $ 228 Other Assets $ —   $ —   Other Assets

(dollars in thousands)
Interest rate product $ 26,000 $ 15 Other Liabilities $ —   $ —   Other Liabilities
Interest rate product 26,517 220 Other Liabilities
Other Contracts 27,500 117 Other Liabilities 27,500 59 Other Liabilities
$ 80,017 $ 352 Other Liabilities $ 27,500 $ 59 Other Liabilities

2019.


	June 30,2020						December 31,2019
	Notional				Balance Sheet	Notional				Balance Sheet
Derivatives designated as hedging instruments	Amount		Fair Value		Category	Amount		Fair Value		Category
Interest rate product	$	100,000	$	1,330	Other Liabilities	$	100,000	$	206	Other Liabilities

Derivatives not designated as hedging instruments

(dollars in thousands)
Interest rate product	$	154,447	$	4,523	Other Assets	$	56,806	$	311	Other Assets

(dollars in thousands)
Interest rate product	$	154,447	$	4,818	Other Liabilities	$	56,806	$	319	Other Liabilities
Other Contracts		27,150		150	Other Liabilities		27,384		86	Other Liabilities
	$	181,597	$	4,968	Other Liabilities	$	84,190	$	405	Other Liabilities

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The table below presents the pre-tax net gains (losses) of the Company’s designated cash flow hedges for the three and ~~nine~~six months ended ~~September~~June 30, 2020 and 2019 ~~and 2018.~~(unaudited):


The Effect of Fair Value and Cash Flow Hedge Accounting on Accumulated Other Comprehensive Income
					Location of Gain or (Loss)	Amount of Gain or (Loss)
	Amount of (Loss) Recognized in				Recognized from	Reclassified from Accumulated OCI
	OCI on Derivative				Accumulated Other	into Income
Derivatives in Subtopic 815-20 Hedging	Three Months Ended June 30,				Comprehensive Income into	Three Months Ended June 30,
Relationships (dollars in thousands)	2020		2019		Income	2020		2019
Derivatives in Cash Flow Hedging Relationships
Interest Rate Products	$	(27)	$	(834)	Interest Expense	$	(394)	$	313
Total	$	(27)	$	(834)		$	(394)	$	313

					Location of Gain or (Loss)
					Recognized from
					Accumulated Other	Amount of Gain or (Loss)
	Amount of (Loss) Recognized in				Comprehensive Income into	Reclassified from Accumulated OCI
	OCI on Derivative				Income	into Income
Derivatives in Subtopic 815-20 Hedging	Six Months Ended June 30,					Six Months Ended June 30,
Relationships (dollars in thousands)	2020		2019			2020		2019
Derivatives in Cash Flow Hedging Relationships
Interest Rate Products	$	(1,548)	$	(1,867)	Interest Expense	$	(366)	$	775
Interest Rate Products		—		—	Gain on sale of investment securities		—		829
Total	$	(1,548)	$	(1,867)		$	(366)	$	1,604

Derivatives in Subtopic 815-20 Hedging Relationships
(dollars in thousands) Amount of Gain or (Loss)
Recognized
in OCI on Derivative Location of Gain or (Loss)
Recognized from
Accumulated
Other Comprehensive
Income into Income Amount of Gain or (Loss)
Reclassified from
Accumulated
OCI into Income
Three Months Ended September 30, Three Months Ended September 30,
2019 2018 2019 2018
Derivatives in Cash Flow Hedging Relationships
Interest Rate Products $ (107 ) $ 849 Interest Expense $ 264 $ 214
Total $ (107 ) $ 849 $ 264 $ 214

Derivatives in Subtopic 815-20 Hedging Relationships
(dollars in thousands) Amount of Gain or (Loss)
Recognized
in OCI on Derivative Location of Gain or (Loss)
Recognized from
Accumulated
Other Comprehensive
Income into Income Amount of Gain or (Loss)
Reclassified from
Accumulated
OCI into Income
Nine Months Ended September 30, Nine Months Ended September 30,
2019 2018 2019 2018
Derivatives in Cash Flow Hedging Relationships
Interest Rate Products $ (1,974 ) $ 4,401 Interest Expense $ 1,039 $ 230
Interest Rate Products — — Gain on sale of investment securities 829 —
Total $ (1,974 ) $ 4,401 $ 1,868 $ 230

The table below presents the effect of the Company’s derivative financial instruments on the Consolidated Statements of Operations for the three and ~~nine~~six months ended ~~September~~June 30, 2020 and 2019 ~~and 2018.~~

(unaudited):

~~The Effect of Fair Value and Cash Flow Hedge Accounting on the Statement of Financial Performance~~

Location and Amount of Gain or (Loss) Recognized in Income on Fair Value
and Cash Flow Hedging Relationships (in 000's)
Three Months Ended September 30, Nine Months Ended September 30,
2019 2018 2019 2019 2018
Interest Expense Interest Expense Gain on sale of
investment
securities Interest Expense
Total amounts of income and expense line items presented in the statement of financial performance in which the effects of fair value or cash flow hedges are recorded $ 264 $ 214 $ 1,039 $ 829 $ 16

Gain or (loss) on cash flow hedging relationships in Subtopic 815-20
Interest contracts
Amount of gain or (loss) reclassified from accumulated other  comprehensive income into income $ 264 $ 214 $ 1,039 $ —   $ 230
Amount of gain or (loss) reclassified from accumulated other comprehensive income into income as a result that a forecasted transaction is no longer probable of occurring $ —   $ —   $ —   $ 829 $ —
Amount of Gain or (Loss) Reclassified from Accumulated OCI into Income -  Included Component $ 264 $ 214 $ 1,039 $ 829 $ 230
Amount of Gain or (Loss) Reclassified from Accumulated OCI into Income -  Excluded Component $ — $ — $ — $ — $ —

Effect of Derivatives Not Designated as Hedging Instruments on the Statement of Financial Performance
Derivatives Not Designated as
Hedging Instruments under Subtopic
815-20 Location of Gain or
(Loss) Recognized in
Income on Derivative Amount of Gain or (Loss)
Recognized in Income on
Derivative Amount of Gain or (Loss)
Recognized in Income on
Derivative
Three Months Ended September 30, Nine Months Ended September 30,
2019 2018 2019 2018

Interest Rate Products Other income / (expense) (7 ) (7 )
Other Contracts Other income / (expense) (16 ) — (58 ) —
Total (23 ) — (65 ) —


The Effect of Fair Value and Cash Flow Hedge Accounting on the Statements of Operation
	Location and Amount of Gain or (Loss) Recognized in Income on
	Fair Value and Cash Flow Hedging Relationships (in 000's)
	Three Months Ended June 30,				Six Months Ended June 30,
	2020		2019		2020		2019		2019

	Interest				Interest		Interest		Gain on sale of
	Expense				Expense		Expense		investment securities
Total amounts of income and expense line items presented in the statement of financial performance in which the effects of fair value or cash flow hedges are recorded	$	(394)	$	313	$	(366)	$	775	$	829

Gain or (loss) on cash flow hedging relationships in Subtopic 815-20
Interest contracts
Amount of gain or (loss) reclassified from accumulated other comprehensive income into income	$	(394)	$	313	$	(366)	$	775	$	—
Amount of gain or (loss) reclassified from accumulated other comprehensive income into income as a result that a forecasted transaction is no longer probable of occurring	$	—	$	—	$	—	$	—	$	829
Amount of Gain or (Loss) Reclassified from Accumulated OCI into Income - Included Component	$	(394)	$	313	$	(366)	$	775	$	—
Amount of Gain or (Loss) Reclassified from Accumulated OCI into Income - Excluded Component	$	—	$	—	$	—	$	—	$	—

Table of Contents

Effect of Derivatives Not Designated as Hedging Instruments on the Statements of Operation

Amount of Gain or (Loss)

Amount of (Loss)

Recognized in Income on

Location of Gain or

Derivative

Derivatives Not Designated as Hedging

(Loss) Recognized in

Three Months Ended June 30,

Six Months Ended June 30,

Instruments under Subtopic 815-20

Income on Derivative

2020

2019

2020

2019

Interest Rate Products

Other income / (expense)

(118)

—

(286)

—

Other Contracts

Other income / (expense)

(29)

(64)

(42)

Total

(116)

(29)

(350)

(42)

Balance Sheet Offsetting:Our designated cash flow hedge interest rate derivatives are eligible for offset in the Consolidated Balance Sheets and are subject to master netting arrangements. Our derivative transactions with counterparties are generally executed under International Swaps and Derivative Association (“ISDA”) master agreements which include “right of set-off” provisions. In such cases there is generally a legally enforceable right to offset recognized amounts and there may be an intention to settle such amounts on a net basis. The Company generally offsets such financial instruments for financial reporting purposes.

The table below presents a gross presentation, the effects of offsetting, and a net presentation of the Company’s cash flow hedge derivatives as of ~~September~~June 30, ~~2019~~2020 (unaudited) and December 31, ~~2018.~~2019.

As of June 30, 2020

Net

Amounts of

Gross

Assets

Gross Amounts Not Offset in the

Gross

Amounts

presented

Balance Sheet

Amounts of

Offset in

in the

Cash

Recognized

the Balance

Balance

Financial

Collateral

Net

Offsetting of Derivative Assets (dollars in thousands)

Assets

Sheet

Instruments

Posted

Amount

Derivatives

4,523

—

4,523

—

4,523

Net

Amounts of

Gross

Liabilities

Gross Amounts Not Offset in the

Gross

Amounts

presented

Balance Sheet

Amounts of

Offset in

in the

Cash

Recognized

the Balance

Balance

Financial

Collateral

Net

Offsetting of Derivative Liabilities (dollars in thousands)

Liabilities

Sheet

Instruments

Posted

Amount

Derivatives

6,297

—

6,297

—

2,170

4,127

As of December 31, 2019

Net

Amounts of

Gross

Assets

Gross Amounts Not Offset in the

Gross

Amounts

presented

Balance Sheet

Amounts of

Offset in

in the

Cash

Recognized

the Balance

Balance

Financial

Collateral

Net

Offsetting of Derivative Assets (dollars in thousands)

Assets

Sheet

Instruments

Posted

Amount

Derivatives

311

—

311

—

311

Net

Amounts of

Gross

Liabilities

Gross Amounts Not Offset in the

Gross

Amounts

presented

Balance Sheet

Amounts of

Offset in

in the

Cash

Recognized

the Balance

Balance

Financial

Collateral

Net

Offsetting of Derivative Liabilities (dollars in thousands)

Liabilities

Sheet

Instruments

Posted

Amount

Derivatives

611

—

611

—

500

111

As of September 30, 2019
Offsetting of Derivative Assets (dollars in thousands) Gross Amounts Not Offset in the Balance Sheet
Gross Amounts of
Recognized Assets Gross Amounts
Offset in the
Balance Sheet Net Amounts of
Assets presented
in the
Balance Sheet Financial Instruments Cash Collateral Posted Net Amount
Derivatives $ 228 $ — $ 228 $ — $ — $ 228

Offsetting of Derivative Liabilities (dollars in thousands) Gross Amounts Not Offset in the Balance Sheet
Gross Amounts of
Recognized
Liabilities Gross Amounts
Offset in the
Balance Sheet Net Amounts of
Liabilities presented
in the Balance Sheet Financial Instruments Cash Collateral Posted Net Amount
Derivatives $ 669 $ — $ 669 $ — $ — $ 669

As of December 31, 2018
Offsetting of Derivative Assets (dollars in thousands) Gross Amounts Not Offset in the Balance Sheet
Gross Amounts of
Recognized Assets Gross Amounts
Offset in the
Balance Sheet Net Amounts of
Assets presented in
the Balance Sheet Financial Instruments Cash Collateral Posted Net Amount
Derivatives $ 3,840 $ — $ 3,840 $ — $ — $ 3,840

Table of Contents

Note 9.8. Other Real Estate Owned

The activity within Other Real Estate Owned (“OREO”) for the three and ~~nine~~six months ended ~~September~~June 30, 2020 and 2019 ~~and 2018~~(unaudited) is presented in the table below. There were ~~two~~no residential real estate loans in the process of foreclosure as of ~~September~~June 30, ~~2019 totaling $4.0 million~~.

2020. For the three and ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 and ~~2018,~~2019, there were no0 sales of OREO property.


	Three Months Ended June 30,				Six Months Ended June 30,
(dollars in thousands)	2020		2019		2020		2019
Beginning Balance	$	8,237	$	1,394	$	1,487	$	1,394
Real estate acquired from borrowers		—		—		6,750		—
Properties sold		—		—		—		—
Ending Balance	$	8,237	$	1,394	$	8,237	$	1,394

Three Months Ended September 30, Nine Months Ended September 30,
(dollars in thousands) 2019 2018 2019 2018
Beginning Balance $ 1,394 $ 1,394 $ 1,394 $ 1,394
Real estate acquired from borrowers 93 — 93 —
Properties sold — — — —
Ending Balance $ 1,487 $ 1,394 $ 1,487 $ 1,394

Note ~~10.~~9. Long-Term Borrowings

The following table presents information related to the Company’s long-term borrowings as of ~~September~~June 30, ~~2019~~2020 (unaudited) and December 31, ~~2018.~~2019.


(dollars in thousands)	June 30, 2020		December 31, 2019
Subordinated Notes, 5.75%	$	70,000	$	70,000
Subordinated Notes, 5.0%		150,000		150,000
FHLB Advance, 1.81%		50,000		—
Less: unamortized debt issuance costs		(2,118)		(2,313)
Long-term borrowings	$	267,882	$	217,687

(dollars in thousands) September 30, 2019 December 31, 2018
Subordinated Notes, 5.75% $ 70,000 $ 70,000
Subordinated Notes, 5.00% 150,000 150,000
Less: unamortized debt issuance costs (2,411 ) (2,704 )
Long-term borrowings $ 217,589 $ 217,296

On August 5, 2014, the Company completed the sale of $~~70.0~~$70.0 million of its ~~5.75~~%5.75% subordinated notes, due September 1, 2024 (the “2024 Notes”). The 2024 Notes were offered to the public at par and qualify as Tier 2 capital for regulatory purposes to the fullest extent permitted under the Basel III Rule capital requirements. The net proceeds were approximately $~~68.8~~$68.8 million,, which includes $~~1.2~~$1.2 million in deferred financing costs which are being amortized over the life of the 2024 Notes.

On July 26, 2016, the Company completed the sale of $~~150.0~~$150.0 million of its ~~5.00~~%5.00% Fixed-to-Floating Rate Subordinated Notes, due August 1, 2026 (the “2026 Notes”). The 2026 Notes were offered to the public at par and qualify as Tier 2 capital for regulatory purposes to the fullest extent permitted under the Basel III Rule capital requirements. The net proceeds were approximately $~~147.35~~$147.35 million,, which includes $~~2.6~~$2.6 million in deferred financing costs which are being amortized over the life of the 2026 Notes.

On February 26, 2020, the Bank borrowed $50 million dollars under its borrowing arrangement with the Federal Home Loan Bank of Atlanta at a fixed rate of 1.81% with a maturity date of February 26, 2030 as part of the overall asset liability strategy and to support loan growth.

Table of Contents

Note ~~11.~~10. Net Income per Common Share

The calculation of net income per common share for the three and ~~nine~~six months ended ~~September~~June 30, 2020 and 2019 ~~and 2018~~(unaudited) was as follows:


	Three Months Ended June 30,				Six Months Ended June 30,
(dollars and shares in thousands, except per share data)	2020		2019		2020		2019
Basic:
Net income	$	28,856	$	37,243	$	51,979	$	70,992
Average common shares outstanding		32,225		34,540		32,537		34,511
Basic net income per common share	$	0.90	$	1.08	$	1.60	$	2.06

Diluted:
Net income	$	28,856	$	37,243	$	51,979	$	70,992
Average common shares outstanding		32,225		34,540		32,537		34,511
Adjustment for common share equivalents		16		25		24		38
Average common shares outstanding-diluted		32,241		34,565		32,561		34,549
Diluted net income per common share	$	0.90	$	1.08	$	1.60	$	2.05

Anti-dilutive shares		49		2		26		19

Three Months Ended September 30, Nine Months Ended September 30,
(dollars and shares in thousands, except per share data) 2019 2018 2019 2018
Basic:
Net income $ 36,495 $ 38,948 $ 107,487 $ 111,959
Average common shares outstanding 34,233 34,309 34,418 34,292
Basic net income per common share $ 1.07 $ 1.14 $ 3.12 $ 3.26

Diluted:
Net income $ 36,495 $ 38,948 $ 107,487 $ 111,959
Average common shares outstanding 34,233 34,309 34,418 34,292
Adjustment for common share equivalents 23 152 33 152
Average common shares outstanding-diluted 34,256 34,461 34,451 34,444
Diluted net income per common share $ 1.07 $ 1.13 $ 3.12 $ 3.25

Anti-dilutive shares 2 3 20 —

Table of Contents

Note ~~12.~~11. Other Comprehensive Income

The following table presents the components of other comprehensive income (loss) for the three and ~~nine~~six months ended ~~September~~June 30, 2020 and 2019 ~~and 2018.~~(unaudited).


(dollars in thousands)	Before Tax			Tax Effect			Net of Tax				Before Tax		Tax Effect		Net of Tax

Three Months Ended September 30, 2019
Three Months Ended June 30, 2020
Net unrealized gain on securities available-for-sale	$	1,585		$	411		$	1,174			$	2,506	$	(636)	$	1,870
Less: Reclassification adjustment for net gains included in net income		(153	)		(43	)		(110	)			(713)		(176)		(537)
Total unrealized gain		1,432			368			1,064				1,793		(812)		1,333

Net unrealized gain on derivatives		24			(13	)		11
Less: Reclassification adjustment for gain included in net income		(285	)		(80	)		(205	)
Total unrealized loss		(261	)		(67	)		(194	)


Net unrealized loss on derivatives												(28)		3		(25)
Less: Reclassification adjustment for loss included in net income												393		98		295
Total unrealized gain												365		101		270

Other Comprehensive Income	$	1,171		$	301		$	870			$	2,158	$	(711)	$	1,603

Three Months Ended September 30, 2018
Net unrealized loss on securities available-for-sale	$	(4,253	)	$	1,105		$	(3,148	)
Less: Reclassification adjustment for net gains included in net income		—			—			—
Total unrealized loss		(4,253	)		1,105			(3,148	)

Net unrealized gain on derivatives		846			221			625
Less: Reclassification adjustment for losses included in net income		(211	)		(53	)		(158	)
Total unrealized gain		635			168			467

Other Comprehensive Loss	$	(3,618	)	$	1,273		$	(2,681	)

Nine Months Ended September 30, 2019

Three Months Ended June 30, 2019
Net unrealized gain on securities available-for-sale	$	17,712		$	(4,572	)	$	13,140			$	7,976	$	2,051	$	5,925
Less: Reclassification adjustment for net gains included in net income		(1,628	)		(438	)		(1,190	)			(563)		(146)		(417)
Total unrealized gain		16,084			(5,010	)		11,950				7,413		1,905		5,508


Net unrealized loss on derivatives		(2,210	)		546			(1,664	)			(171)		(342)		(513)
Less: Reclassification adjustment for gain included in net income		(1,879	)		(505	)		(1,374	)			(319)		(83)		(236)
Total unrealized loss		(4,089	)		41			(3,038	)	��		(490)		259		(749)


Other Comprehensive Income	$	11,995		$	(4,969	)	$	8,912			$	6,923	$	2,164	$	4,759

Nine Months Ended September 30, 2018
Net unrealized loss on securities available-for-sale	$	(13,079	)	$	2,873		$	(10,206	)

Six Months Ended June 30, 2020
Net unrealized gain on securities available-for-sale											$	16,172	$	(4,483)	$	11,689
Less: Reclassification adjustment for net gains included in net income		(68	)		(17	)		(51	)			1,535		391		1,144
Total unrealized gain												17,707		(4,092)		12,833

Net unrealized loss on derivatives												(2,017)		671		(1,346)
Less: Reclassification adjustment for gain included in net income												299		77		222
Total unrealized loss		(13,147	)		2,856			(10,257	)			(1,718)		748		(1,124)

Net unrealized gain on derivatives		4,380			833			3,547
Less: Reclassification adjustment for losses included in net income		(209	)		(53	)		(156	)

Other Comprehensive Income											$	15,989	$	(3,344)	$	11,709

Six Months Ended June 30, 2019
Net unrealized gain on securities available-for-sale											$	16,127	$	(4,148)	$	11,979
Less: Reclassification adjustment for net gains included in net income												(1,475)		(383)		(1,092)
Total unrealized gain		4,171			780			3,391				14,652		(4,531)		10,887

Other Comprehensive Loss	$	(8,976	)	$	3,636		$	(6,866	)

Net unrealized loss on derivatives												(2,234)		569		(1,665)
Less: Reclassification adjustment for gain included in net income												(1,594)		(414)		(1,180)
Total unrealized loss												(3,828)		155		(2,845)

Other Comprehensive Income											$	10,824	$	(4,376)	$	8,042

Table of Contents

The following table presents the changes in each component of accumulated other comprehensive income (loss), net of tax, for the three and ~~nine~~six months ended ~~September~~June 30, 2020 and 2019 ~~and 2018.~~(unaudited).


										Securities				Accumulated Other
										Available				Comprehensive Income
(dollars in thousands)	Securities Available For Sale			Derivatives			Accumulated Other Comprehensive Income (Loss)			For Sale		Derivatives		(Loss)

Three Months Ended September 30, 2019
Three Months Ended June 30, 2020
Balance at Beginning of Period										$	14,609	$	(1,544)	$	13,065
Other comprehensive income before reclassifications											1,870		565		2,435
Amounts reclassified from accumulated other comprehensive income (loss)											(537)		(295)		(832)
Net other comprehensive income during period											1,333		270		1,603
Balance at End of Period										$	15,942	$	(1,274)	$	14,668

										Securities				Accumulated Other
										Available				Comprehensive Income
(dollars in thousands)										For Sale		Derivatives		(Loss)
Three Months Ended June 30, 2019
Balance at Beginning of Period	$	3,842		$	75		$	(3,767	)	$	(1,665)	$	673	$	(992)
Other comprehensive income (loss) before reclassifications		1,174			(11	)		1,185			5,925		(513)		5,412
Amounts reclassified from accumulated other comprehensive income		(110	)		(205	)		(315	)		(417)		(236)		(653)
Net other comprehensive income (loss) during period		1,064			(194	)		870			5,508		(749)		4,759
Balance at End of Period	$	4,906		$	(269	)	$	4,637		$	3,843	$	(76)	$	3,767

Three Months Ended September 30, 2018

										Securities				Accumulated Other
										Available				Comprehensive Income
(dollars in thousands)										For Sale		Derivatives		(Loss)
Six Months Ended June 30, 2020
Balance at Beginning of Period	$	(10,914	)	$	4,305		$	(6,609	)	$	3,109	$	(150)	$	2,959
Other comprehensive income (loss) before reclassifications		(3,148	)		625			(2,523	)		13,977		(902)		13,075
Amounts reclassified from accumulated other comprehensive income		—			(158	)		(158	)		(1,144)		(222)		(1,366)
Net other comprehensive (loss) income during period		(3,148	)		467			(2,681	)
Net other comprehensive income (loss) during period											12,833		(1,124)		11,709
Balance at End of Period	$	(14,062	)	$	4,772		$	(9,290	)	$	15,942	$	(1,274)	$	14,668

										Securities				Accumulated Other
										Available				Comprehensive Income
(dollars in thousands)										For Sale		Derivatives		(Loss)
Six Months Ended June 30, 2019
Balance at Beginning of Period										$	(7,044)	$	2,769	$	(4,275)
Other comprehensive income (loss) before reclassifications											11,979		(1,665)		10,314
Amounts reclassified from accumulated other comprehensive income											(1,092)		(1,180)		(2,272)
Net other comprehensive income (loss) during period											10,887		(2,845)		8,042
Balance at End of Period										$	3,843	$	(76)	$	3,767

(dollars in thousands) Securities Available For Sale Derivatives Accumulated Other Comprehensive Income (Loss)
Nine Months Ended September 30, 2019
Balance at Beginning of Period $ (7,044 ) $ 2,769 $ (4,275 )
Other comprehensive income (loss) before reclassifications 13,140 (1,664 ) 11,476
Amounts reclassified from accumulated other comprehensive income (1,190 ) (1,374 ) (2,564 )
Net other comprehensive income (loss) during period 11,950 (3,038 ) 8,912
Balance at End of Period $ 4,906 $ (269 ) $ 4,637

Nine Months Ended September 30, 2018
Balance at Beginning of Period $ (3,131 ) $ 1,381 $ (1,750 )
Other comprehensive income (loss) before reclassifications (10,206 ) 3,547 (6,659 )
Amounts reclassified from accumulated other comprehensive income (51 ) (156 ) (207 )
Net other comprehensive (loss) income during period (10,257 ) 3,391 (6,866 )
Reclassification of the Income Tax Effects of the Tax Cuts and Jobs Act from AOCI (674 ) — (674 )
Balance at End of Period $ (14,062 ) $ 4,772 $ (9,290 )

Table of Contents

The following ~~table presents~~tables present the amounts reclassified out of each component of accumulated other comprehensive income (loss) for the three and ~~nine~~six months ended ~~September~~June 30, 2020 and 2019 ~~and 2018.~~(unaudited).


	Amount Reclassified from
	Accumulated Other				Affected Line Item in
Details about Accumulated Other	Comprehensive (Loss) Income				the Statement Where
Comprehensive Income Components	Three Months Ended June 30,				Net Income is Presented
(dollars in thousands)	2020		2019
Realized gain on sale of investment securities	$	713	$	563	Gain on sale of investment securities
Interest income derivative deposits		393		319	Interest expense on deposits
Income tax expense		(274)		(229)	Income Tax Expense
Total Reclassifications for the Period	$	832	$	653	Net Income

	Amount Reclassified from
	Accumulated Other				Affected Line Item in
Details about Accumulated Other	Comprehensive (Loss) Income				the Statement Where
Comprehensive Income Components	Six Months Ended June 30,				Net Income is Presented
(dollars in thousands)	2020		2019
Realized gain on sale of investment securities	$	1,535	$	1,475	Gain on sale of investment securities
Realized gain on swap termination		—		829	Gain on sale of investment securities
Interest income derivative deposits		299		765	Interest expense on deposits
Income tax expense		(468)		(797)	Income Tax Expense
Total Reclassifications for the Period	$	1,366	$	2,272	Net Income

Details about Accumulated Other
Comprehensive Income Components
(dollars in thousands) Amount Reclassified from
Accumulated Other
Comprehensive Income (Loss) Affected Line Item in
the Statement Where
Net Income is Presented
Three Months Ended September 30,
2019 2018
Realized gain on sale of investment securities $ 153 $ — Gain on sale of investment securities
Interest income (expense) derivative deposits 285 (211 ) Interest expense on deposits
Income tax (expense) benefit (123 ) 53 Income Tax Expense
Total Reclassifications for the Period $ 315 $ (158 ) Net Income

Details about Accumulated Other
Comprehensive Income Components
(dollars in thousands) Amount Reclassified from
Accumulated Other
Comprehensive Income Affected Line Item in
the Statement Where
Net Income is Presented
Nine Months Ended September 30,
2019 2018
Realized gain on sale of investment securities $ 1,628 $ (68 ) Gain on sale of investment securities
Realized gain on swap termination 829 — Gain on sale of investment securities
Interest income (expense) derivative deposits 1,050 (209 ) Interest expense on deposits
Income tax (benefit) expense (943 ) 70 Income Tax Expense
Total Reclassifications for the Period $ 2,564 $ (207 ) Net Income

Note ~~13.~~12. Fair Value Measurements

The fair value of an asset or liability is the price that would be received to sell that asset or paid to transfer that liability in an orderly transaction occurring in the principal market (or most advantageous market in the absence of a principal market) for such asset or liability. In estimating fair value, the Company utilizes valuation techniques that are consistent with the market approach, the income approach and/or the cost approach. Such valuation techniques are consistently applied. Inputs to valuation techniques include the assumptions that market participants would use in pricing an asset or liability. ASC Topic 820, “Fair Value Measurements and Disclosures,” establishes a fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as follows:

Level 1 Quoted prices in active exchange markets for identical assets or liabilities; also includes certain U.S. Treasury and other U.S. Government and agency securities actively traded in over-the-counter markets.

~~Level 1~~

Quoted prices in active exchange markets for identical assets or liabilities; also includes certain U.S. Treasury and other U.S. Government and agency securities actively traded in over-the-counter markets.

Level 2 Observable inputs other than Level 1 including quoted prices for similar assets or liabilities, quoted prices in less active markets, or other observable inputs that can be corroborated by observable market data; also includes derivative contracts whose value is determined using a pricing model with observable market inputs or can be derived principally from or corroborated by observable market data. This category generally includes certain U.S. Government and agency securities, corporate debt securities, derivative instruments, and residential mortgage loans held for sale.

~~Level 2~~

Observable inputs other than Level 1 including quoted prices for similar assets or liabilities, quoted prices in less active markets, or other observable inputs that can be corroborated by observable market data; also includes derivative contracts whose value is determined using a pricing model with observable market inputs or can be derived principally from or corroborated by observable market data. This category generally includes certain U.S. Government and agency securities, corporate debt securities, derivative instruments, and residential mortgage loans held for sale.

~~Level 3~~

Unobservable inputs supported by little or no market activity for financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation; also includes observable inputs for single dealer nonbinding quotes not corroborated by observable market data. This category generally includes certain private equity investments, retained interests from securitizations, and certain collateralized debt obligations.

32Level 3 Unobservable inputs supported by little or no market activity for financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation; also includes observable inputs for single dealer nonbinding quotes not corroborated by observable market data. This category generally includes certain private equity investments, retained interests from securitizations, and certain collateralized debt obligations.

Table of Contents

Assets and Liabilities Recorded at Fair Value on a Recurring Basis

The ~~table~~tables below ~~presents~~present the recorded amount of assets and liabilities measured at fair value on a recurring basis as of ~~September~~June 30, ~~2019~~2020 (unaudited) and December 31, ~~2018.~~2019.


			Significant		Significant
			Other		Other
			Observable		Unobservable
	Quoted Prices		Inputs		Inputs		Total
(dollars in thousands)	(Level 1)		(Level 2)		(Level 3)		(Fair Value)
June 30, 2020
Assets:
Investment securities available-for-sale:
U. S. agency securities	$	—	$	117,054	$	—	$	117,054
Residential mortgage backed securities		—		531,528		—		531,528
Municipal bonds		—		90,694		—		90,694
Corporate bonds		—		—		32,920		32,920
Other equity investments		—		—		198		198
Loans held for sale		—		68,433		—		68,433
Interest Rate Caps		—		4,454		—		4,454
Total assets measured at fair value on a recurring basis as of June 30, 2020	$	—	$	812,163	$	33,118	$	845,281
Liabilities:
Interest rate swap derivatives	$	—	$	1,330	$	—	$	1,330
Derivative liability		—		150		—		150
Interest Rate Caps		—		4,748		—		4,748
Total liabilities measured at fair value on a recurring basis as of June 30, 2020	$	—	$	6,228	$	—	$	6,228
December 31, 2019
Assets:
Investment securities available-for-sale:
U. S. agency securities	$	—	$	179,794	$	—	$	179,794
Residential mortgage backed securities		—		543,852		—		543,852
Municipal bonds		—		73,931		—		73,931
Corporate bonds		—		—		10,733		10,733
U.S. Treasury		—		34,855		—		34,855
Other equity investments		—		—		198		198
Loans held for sale		—		56,707		—		56,707
Interest Rate Caps		—		317		—		317
Mortgage banking derivatives		—		—		280		280
Total assets measured at fair value on a recurring basis as of December 31, 2019	$	—	$	889,456	$	11,211	$	900,667
Liabilities:
Interest rate swap derivatives	$	—	$	203	$	—	$	203
Derivative liability		—		86		—		86
Interest Rate Caps		—		312		—		312
Mortgage banking derivatives		—		—		66		66
Total liabilities measured at fair value on a recurring basis as of December 31, 2019	$	—	$	601	$	66	$	667

(dollars in thousands) Quoted Prices (Level 1) Significant Other Observable Inputs
(Level 2) Significant Other Unobservable Inputs
(Level 3) Total
(Fair Value)
September 30, 2019
Assets:
Investment securities available-for-sale:
U. S. agency securities $ —   $ 171,820 $ —   $ 171,820
Residential mortgage backed securities —   438,029 —   438,029
Municipal bonds —   63,958 —   63,958
Corporate bonds —   —   9,614 9,614
U.S. Treasury — 24,926 —   24,926
Other equity investments —   —   198 198
Loans held for sale —   52,199 —   52,199
Interest Rate Caps —   228 —   228
Mortgage banking derivatives —   —   313 313
Total assets measured at fair value on a recurring basis as of September 30, 2019 $ —   $ 751,160 $ 10,125 $ 761,285

Liabilities:
Interest rate swap derivatives $ —   $ 362 $ —   $ 362
Derivative liability —   117 —   117
Interest Rate Caps —   235 —   235
Mortgage banking derivatives —   — 3 3
Total liabilities measured at fair value on a recurring basis as of September 30, 2019 $ —   $ 714 $ 3 $ 717

December 31, 2018
Assets:
Investment securities available-for-sale:
U. S. agency securities $ —   $ 256,345 $ —   $ 256,345
Residential mortgage backed securities —   472,231 —   472,231
Municipal bonds —   45,769 —   45,769
Corporate bonds —   —   9,576 9,576
Other equity investments —   —   218 218
Loans held for sale —   19,254 —   19,254
Mortgage banking derivatives —   —   229 229
Interest rate swap derivatives —   3,727 —   3,727
Total assets measured at fair value on a recurring basis as of December 31, 2018 $ —   $ 797,326 $ 10,023 $ 807,349

Liabilities:
Mortgage banking derivatives $ —   $ —   $ 269 $ 269
Total liabilities measured at fair value on a recurring basis as of December 31, 2018 $ —   $ —   $ 269 $ 269

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Investment Securities Available-for-Sale: Investment securities available-for-sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted prices, if available. If quoted prices are not available, fair value is measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions and other factors such as credit loss assumptions. Level 1 securities include those traded on an active exchange such as the New York Stock Exchange, Treasury securities that are traded by dealers or brokers in active over-the-counter markets and money market funds. Level 2 securities include U.S. agency debt securities, mortgage backed securities issued by Government Sponsored Entities (“GSE’s”) and municipal bonds. Securities classified as Level 3 include securities in less liquid markets, the carrying amounts approximate the fair value.

Loans held for sale: The Company has elected to carry loans held for sale at fair value. This election reduces certain timing differences in the Consolidated Statement of Operations and better aligns with the management of the portfolio from a business perspective. Fair value is derived from secondary market quotations for similar instruments. Gains and losses on sales of residential mortgage loans are recorded as a component of noninterest income in the Consolidated Statements of Operations. Gains and losses on sales of multifamily FHA securities are recorded as a component of noninterest income in the Consolidated Statements of Operations. As such, the Company classifies loans subjected to fair value adjustments as Level 2 valuation.

The following ~~table summarizes~~tables summarize the difference between the aggregate fair value and the aggregate unpaid principal balance for loans held for sale measured at fair value as of ~~September~~June 30, ~~2019~~2020 (unaudited) and December 31, ~~2018.~~2019.


	June 30, 2020
			Aggregate
			Unpaid
			Principal
(dollars in thousands)	Fair Value		Balance		Difference
Loans held for sale	$	68,433	$	67,397	$	1,036


	December 31, 2019
			Aggregate
			Unpaid
			Principal
(dollars in thousands)	Fair Value		Balance		Difference
Loans held for sale	$	56,707	$	55,834	$	873

September 30, 2019
(dollars in thousands) Fair Value Aggregate Unpaid
Principal Balance Difference

Residential mortgage loans held for sale $ 52,199 $ 51,291 $ 908
FHA mortgage loans held for sale $ — $ — $ —

December 31, 2018
(dollars in thousands) Fair Value Aggregate Unpaid
Principal Balance Difference

Residential mortgage loans held for sale $ 19,254 $ 18,797 $ 457
FHA mortgage loans held for sale $ — $ — $ —

NoNaN residential mortgage loans held for sale were 90 or more days past due or on nonaccrual status as of ~~September~~June 30, ~~2019~~2020 or December 31, ~~2018.~~

2019.

Interest rate swap derivatives: These derivative instruments consist of interest rate swap agreements, which are accounted for as cash flow hedges under ASC 815. The Company’s derivative position is classified within Level 2 of the fair value hierarchy and is valued using models generally accepted in the financial services industry and that use actively quoted or observable market input values from external market data providers and/or non-binding broker-dealer quotations. The fair value of the derivatives is determined using discounted cash flow models. These models’ key assumptions include the contractual terms of the respective contract along with significant observable inputs, including interest rates, yield curves, nonperformance risk and volatility. Derivative contracts are executed with a Credit Support Annex, which is a bilateral agreement that requires collateral postings when the market value exceeds certain threshold limits. These agreements protect the interests of the Company and its counterparties should either party suffer a credit rating deterioration.

Credit Risk Participation Agreements: The Company enters into credit risk participation agreements (“RPAs”) with institutional counterparties, under which the Company assumes its pro-rata share of the credit exposure associated with a borrower’s performance related to interest rate derivative contracts. The fair value of RPAs is calculated by determining the total expected asset or liability exposure of the derivatives to the borrowers and applying the borrowers’ credit spread to that exposure. Total expected exposure incorporates both the current and potential future exposure of the derivatives, derived from using observable inputs, such as yield curves and volatilities. Accordingly, RPAs fall within Level 2.

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Interest Rate Caps:~~the~~ The Company entered into an interest rate cap agreement ~~(“cap”~~("cap") with an institutional counterparty, under which the Company will receive cash if and when market rates exceed the ~~cap’s~~cap's strike rate. The fair value of the cap is calculated by determining the total expected asset or liability exposure of the derivatives. Total expected exposure incorporates both the current and potential future exposure of the derivative, derived from using observable inputs, such as yield curves and volatilities. Accordingly, the cap falls within Level 2.

Mortgage banking derivatives: The Company relies on a third-party pricing service to value its mortgage banking derivative financial assets and liabilities, which the Company classifies as a Level 3 valuation. The external valuation model to estimate the fair value of its interest rate lock commitments to originate residential mortgage loans held for sale includes grouping the interest rate lock commitments by interest rate and terms, applying an estimated pull-through rate based on historical experience, and then multiplying by quoted investor prices determined to be reasonably applicable to the loan commitment groups based on interest rate, terms, and rate lock expiration dates of the loan commitment groups. The Company also relies on an external valuation model to estimate the fair value of its forward commitments to sell residential mortgage loans (i.e., an estimate of what the Company would receive or pay to terminate the forward delivery contract based on market prices for similar financial instruments), which includes matching specific terms and maturities of the forward commitments against applicable investor pricing.

The following is a reconciliation of activity for assets and liabilities measured at fair value based on Significant Other Unobservable Inputs (Level 3):

(dollars in thousands) Investment Securities Mortgage Banking Derivatives Total
Assets:
Beginning balance at January 1, 2019 $ 9,794 $ 229 $ 10,023
Realized (loss) gain included in earnings (20 ) 84 64
Unrealized gain included in other comprehensive income 12 — 12
Purchases of available-for-sale securities 3,030 — 3,030
Principal redemption (3,004 ) — (3,004 )
Ending balance at September 30, 2019 $ 9,812 $ 313 $ 10,125

Liabilities:
Beginning balance at January 1, 2019 $ — $ 269 $ 269
Realized gain included in earnings — (266 ) (266 )
Principal redemption — — —
Ending balance at September 30, 2019 $ — $ 3 $ 3

(dollars in thousands) Investment Securities Mortgage Banking Derivatives Total
Assets:
Beginning balance at January 1, 2018 $ 1,718 $ 43 $ 1,761
Realized gain included in earnings — 186 186
Purchases of available-for-sale securities 8,076 — 8,076
Principal redemption — — —
Ending balance at December 31, 2018 $ 9,794 $ 229 $ 10,023



							Investment		Mortgage Banking
(dollars in thousands)							Securities		Derivatives		Total
Assets:
Beginning balance at January 1, 2020							$	10,931	$	280	$	11,211
Realized gain (loss) included in earnings								442		(280)		162
Unrealized gain included in other comprehensive income								1,280		—		1,280
Purchases of available-for-sale securities								41,547		—		41,547
Principal redemption								(21,082)		—		(21,082)
Ending balance at June 30, 2020							$	33,118	$	—	$	33,118

Liabilities:
Beginning balance at January 1, 2018	$	—	$	10	$	10
Beginning balance at January 1, 2020							$	—	$	66	$	66
Realized loss included in earnings		—		259		259		—		(66)		(66)
Principal redemption		—		—		—		—		—		—
Ending balance at December 31, 2018	$	—	$	269	$	269
Ending balance at June 30, 2020							$	—	$	—	$	—


	Investment		Mortgage Banking
(dollars in thousands)	Securities		Derivatives		Total
Assets:
Beginning balance at January 1, 2019	$	9,794	$	229	$	10,023
Realized (loss) gain included in earnings		(20)		51		31
Unrealized gain included in other comprehensive income		131		—		131
Purchases of available-for-sale securities		4,030		—		4,030
Principal redemption		(3,004)		—		(3,004)
Ending balance at December 31, 2019	$	10,931	$	280	$	11,211

Liabilities:
Beginning balance at January 1, 2019	$	—	$	269	$	269
Realized gain included in earnings		—		(203)		(203)
Principal redemption		—		—		—
Ending balance at December 31, 2019	$	—	$	66	$	66

The other equity securities classified as Level 3 consist of equity investments in the form of common stock of two local banking companies which are not publicly traded, and for which the carrying amount approximates fair value.

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Assets and Liabilities Recorded at Fair Value on a Nonrecurring Basis

The Company measures certain assets at fair value on a nonrecurring basis and the following is a general description of the methods used to value such assets.

~~Impaired loans~~: The Company does not record loans at fair value on a recurring basis; however, from time to time, a loan is considered impaired and an allowance for loan loss is established. The Company considers a loan impaired when it is probable that the Company will be unable to collect all amounts due according to the original contractual terms of the note agreement, including both principal and interest. Management has determined that nonaccrual loans and loans that have had their terms restructured in a troubled debt restructuring meet this impaired loan definition. Once a loan is identified as individually impaired, management measures impairment in accordance with ASC Topic 310, ~~“Receivables.”~~ The fair value of impaired loans is estimated using one of several methods, including the collateral value, market value of similar debt, enterprise value, liquidation value and discounted cash flows. Those impaired loans not requiring a specific allowance represent loans for which the fair value of expected repayments or collateral exceed the recorded investment in such loans. At ~~September~~June 30, ~~2019,~~2020, substantially all of the Company’s ~~impaired~~individually evaluated loans were evaluated based upon the fair value of the collateral. In accordance with ASC Topic 820, ~~impaired~~individually evaluated loans where an allowance is established based on the fair value of collateral require classification in the fair value hierarchy. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the loan as nonrecurring Level 2. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Company records the loan as nonrecurring Level 3. ~~For~~

Pre Adoption of CECL: The Company did not record loans at fair value on a recurring basis; however, from time to time, a loan was considered impaired and an allowance for loan loss was established. The Company considered a loan impaired when it was probable that the Company would be unable to collect all amounts due according to the original contractual terms of the note agreement, including both principal and interest. Management had determined that nonaccrual loans and loans that had their terms restructured in a TDR met this impaired loan definition. Once a loan was identified as individually ~~evaluated~~impaired, management measures impairment in accordance with ASC Topic 310, “Receivables.” The fair value of impaired loans was estimated using one of several methods, including the ~~amount~~collateral value, market value of ~~impairment is based upon~~similar debt, enterprise value, liquidation value and discounted cash flows. Those impaired loans not requiring a specific allowance represented loans for which the ~~present~~fair value of expected ~~future cash flows discounted at~~repayments or collateral exceeded the ~~loan’s effective interest rate or the estimated fair value of the underlying collateral for collateral-dependent loans, which the Company classifies as a Level 3 valuation.~~recorded investment in such loans.

Other real estate owned: Other real estate owned is initially recorded at fair value less estimated selling costs. Fair value is based upon independent market prices, appraised values of the collateral or management’s estimation of the value of the collateral, which the Company classifies as a Level 3 valuation.

Assets measured at fair value on a nonrecurring basis are included in the table below:



											Significant		Significant
											Other		Other
											Observable		Unobservable
									Quoted Prices		Inputs		Inputs		Total
(dollars in thousands)	Quoted Prices (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Other Unobservable Inputs (Level 3)		Total (Fair Value)		(Level 1)		(Level 2)		(Level 3)		(Fair Value)
September 30, 2019
Impaired loans:
June 30, 2020
Commercial	$	—	$	—	$	8,776	$	8,776	$	—	$	—	$	18,047	$	18,047
Income producing - commercial real estate		—		—		8,841		8,841		—		—		27,295		27,295
Owner occupied - commercial real estate		—		—		7,032		7,032		—		—		10,815		10,815
Real estate mortgage - residential		—		—		4,985		4,985		—		—		7,960		7,960
Construction - commercial and residential		—		—		9,148		9,148		—		—		5,385		5,385
Home equity		—		—		474		474		—		—		600		600
Other consumer										—		—		6		6
Other real estate owned		—		—		1,487		1,487		—		—		8,237		8,237
Total assets measured at fair value on a nonrecurring basis as of September 30, 2019	$	—	$	—	$	40,743	$	40,743

(dollars in thousands)	Quoted Prices (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Other Unobservable Inputs (Level 3)		Total (Fair Value)
December 31, 2018
Impaired loans:
Commercial	$	—	$	—	$	3,338	$	3,338
Income producing - commercial real estate		—		—		18,937		18,937
Owner occupied - commercial real estate		—		—		5,131		5,131
Real estate mortgage - residential		—		—		1,510		1,510
Construction - commercial and residential		—		—		1,981		1,981
Home equity		—		—		487		487
Other real estate owned		—		—		1,394		1,394
Total assets measured at fair value on a nonrecurring basis as of December 31, 2018	$	—	$	—	$	32,778	$	32,778
Total assets measured at fair value on a nonrecurring basis as of June 30, 2020									$	—	$	—	$	78,345	$	78,345

Table of Contents


			Significant		Significant
			Other		Other
			Observable		Unobservable
	Quoted Prices		Inputs		Inputs		Total
(dollars in thousands)	(Level 1)		(Level 2)		(Level 3)		(Fair Value)
December 31, 2019
Impaired loans:
Commercial	$	—	$	—	$	10,100	$	10,100
Income producing - commercial real estate		—		—		11,948		11,948
Owner occupied - commercial real estate		—		—		6,934		6,934
Real estate mortgage - residential		—		—		4,981		4,981
Construction - commercial and residential		—		—		11,409		11,409
Home equity		—		—		387		387
Other real estate owned		—		—		1,487		1,487
Total assets measured at fair value on a nonrecurring basis as of December 31, 2019	$	—	$	—	$	47,246	$	47,246

Fair Value of Financial Instruments

The Company discloses fair value information about financial instruments for which it is practicable to estimate the value, whether or not such financial instruments are recognized on the balance sheet. Fair value is the amount at which a financial instrument could be exchanged in a current transaction between willing parties, other than in a forced sale or liquidation, and is best evidenced by quoted market price, if one exists.

Quoted market prices, if available, are shown as estimates of fair value. Because no quoted market prices exist for a portion of the Company’s financial instruments, the fair value of such instruments has been derived based on management’s assumptions with respect to future economic conditions, the amount and timing of future cash flows and estimated discount rates. Different assumptions could significantly affect these estimates. Accordingly, the net realizable value could be materially different from the estimates presented below. In addition, the estimates are only indicative of individual financial instrument values and should not be considered an indication of the fair value of the Company taken as a whole.

3643

Table of Contents

The estimated fair value of the Company’s financial instruments at ~~September~~June 30, ~~2019~~2020 and December 31, ~~2018~~2019 are as follows:


					Fair Value Measurements
							Significant
							Other		Significant
					Quoted		Observable		Unobservable
	Carrying				Prices		Inputs		Inputs
(dollars in thousands)	Value		Fair Value		(Level 1)		(Level 2)		(Level 3)
June 30, 2020
Assets
Cash and due from banks	$	12,199	$	12,199	$	—	$	12,199	$	—
Federal funds sold		25,466		25,466		—		25,466		—
Interest bearing deposits with other banks		598,377		598,377		—		598,377		—
Investment securities		772,394		772,394		—		719,212		53,182
Federal Reserve and Federal Home Loan Bank stock		40,018		40,018		—		40,018		—
Loans held for sale		68,433		68,433		—		68,433		—
Loans		7,912,965		7,828,639		—		—		7,828,639
Bank owned life insurance		75,913		75,913		—		75,913		—
Annuity investment		14,480		14,480		—		14,480		—
Interest Rate Caps		4,454		4,454		—		4,454		—

Liabilities
Noninterest bearing deposits		2,416,058		2,416,058		—		2,416,058		—
Interest bearing deposits		4,366,421		4,366,421		—		4,366,421		—
Certificates of deposit		1,153,493		1,149,418		—		1,149,418		—
Customer repurchase agreements		31,198		31,198		—		31,198		—
Borrowings		567,882		548,808		—		548,808		—
Interest rate swap derivatives		1,330		1,330				1,330		—
Derivative liability		150		150		—		150		—
Interest Rate Caps		4,748		4,748		—		4,748		—

December 31, 2019
Assets
Cash and due from banks	$	7,539	$	7,539	$	—	$	7,539	$	—
Federal funds sold		38,987		38,987		—		38,987		—
Interest bearing deposits with other banks		195,447		195,447		—		195,447		—
Investment securities		843,363		843,363		—		832,432		10,931
Federal Reserve and Federal Home Loan Bank stock		35,194		35,194		—		35,194		—
Loans held for sale		56,707		56,707		—		56,707		—
Loans		7,472,090		7,550,249		—		—		7,550,249
Bank owned life insurance		75,724		75,724		—		75,724		—
Annuity investment		14,697		14,697		—		14,697		—
Interest Rate Caps		280		280		—		280		—

Liabilities
Noninterest bearing deposits		2,064,367		2,064,367		—		2,064,367		—
Interest bearing deposits		3,876,985		3,876,985		—		3,876,985		—
Certificates of deposit		1,283,039		1,291,688		—		1,291,688		—
Customer repurchase agreements		30,980		30,980		—		30,980		—
Borrowings		467,687		328,330		—		328,330		—
Interest rate swap derivatives		203		203				203		—
Derivative liability		86		86		—		86		—
Interest Rate Caps		312		312		—		312		—
Mortgage banking derivatives		66		66		—		—		66

Fair Value Measurements
(dollars in thousands) Carrying Value Fair Value Quoted Prices (Level 1) Significant Other Observable Inputs
(Level 2) Significant Unobservable Inputs
(Level 3)
September 30, 2019
Assets
Cash and due from banks $ 6,657 $ 6,657 $ —   $ 6,657 $ —
Federal funds sold 27,711 27,711 —   27,711 —
Interest bearing deposits with other banks 361,154 361,154 —   361,154 —
Investment securities 708,545 708,545 —   698,733 9,812
Federal Reserve and Federal Home Loan Bank stock 28,725 28,725 —   28,725 —
Loans held for sale 52,199 52,199 —   52,199 —
Loans 7,485,441 7,572,385 —   —   7,572,385
Bank owned life insurance 74,726 74,726 —   74,726 —
Annuity investment 12,103 12,103 —   12,103 —
Interest Rate Caps 228 228 —   228 —
Mortgage banking derivatives 313 313 —   —   313

Liabilities
Noninterest bearing deposits 2,051,106 2,051,106 —   2,051,106 —
Interest bearing deposits 3,952,541 3,952,541 —   3,952,541 —
Certificates of deposit 1,398,866 1,443,542 —   1,443,542 —
Customer repurchase agreements 30,297 30,297 —   30,297 —
Borrowings 317,589 328,330 —   328,330 —
Interest rate swap derivatives 362 362 362 —
Derivative liability 117 117 —   117 —
Interest Rate Caps 235 235 —   235 —
Mortgage banking derivatives 3 3 —   —   3

December 31, 2018
Assets
Cash and due from banks $ 6,773 $ 6,773 $ —   $ 6,773 $ —
Federal funds sold 11,934 11,934 —   11,934 —
Interest bearing deposits with other banks 303,157 303,157 —   303,157 —
Investment securities 784,139 784,139 —   774,345 9,794
Federal Reserve and Federal Home Loan Bank stock 23,506 23,506 —   23,506 —
Loans held for sale 19,254 19,254 —   19,254 —
Loans 6,921,503 6,921,048 —   —   6,921,048
Bank owned life insurance 73,441 73,441 —   73,441 —
Annuity investment 12,417 12,417 —   12,417 —
Mortgage banking derivatives 229 229 —   —   229
Interest rate swap derivatives 3,727 3,727 —   3,727 —

Liabilities
Noninterest bearing deposits 2,104,220 2,104,220 —   2,104,220 —
Interest bearing deposits 3,542,666 3,542,666 —   3,542,666 —
Certificates of deposit 1,327,400 1,325,209 —   1,325,209 —
Customer repurchase agreements 30,413 30,413 —   30,413 —
Borrowings 217,196 218,006 —   218,006 —
Mortgage banking derivatives 269 269 —   —   269

~~Note 14. Supplemental Executive Retirement Plan~~

~~The Bank has entered into Supplemental Executive Retirement and Death Benefit Agreements (the “SERP Agreements”) with certain~~Table of the Bank’s executive officers, which upon the executive’s retirement, will provide for a stated monthly payment for such executive’s lifetime subject to certain death benefits described below. The retirement benefit is computed as a percentage of each executive’s projected average base salary over the ~~five years~~Contents ~~preceding retirement, assuming retirement at age~~ 67~~. The SERP Agreements provide that (a) the benefits vest ratably over~~ ~~six years~~ of service to the Bank, with the executive receiving credit for years of service prior to entering into the SERP Agreement, (b) death, disability and change-in-control shall result in immediate vesting, and (c) the monthly amount will be reduced if retirement occurs earlier than age 67 ~~for any reason other than death, disability or change-in-control. The SERP Agreements further provide for a death benefit in the event the retired executive dies prior to receiving~~ ~~180~~ ~~monthly installments, paid either in a lump sum payment or continued monthly installment payments, such that the executive’s beneficiary has received payment(s) sufficient to equate to a cumulative~~ ~~180~~ ~~monthly installments.~~

The SERP Agreements are unfunded arrangements maintained primarily to provide supplemental retirement benefits and comply with Section 409A of the Internal Revenue Code. The Bank financed the retirement benefits by purchasing fixed annuity contracts with 4 ~~insurance carriers in 2013 totaling $11.4 million~~ that have been designed to provide a future source of funds for the lifetime retirement benefits of the SERP Agreements. The primary impetus for utilizing fixed annuities is a substantial savings in compensation expenses for the Bank as opposed to a traditional SERP Agreement. For the three and nine months ended September 30, 2019, the annuity contracts accrued $~~51 thousand~~ ~~of income and $147 thousand~~ ~~of income offset by $165 thousand~~ of annual fees, respectively, which were included in other noninterest income on the Consolidated Statement of Operations. For the three and nine months ended September 30, 2018, the annuity contracts accrued $~~56 thousand~~ ~~of income and $161 thousand~~ ~~of income offset by $123 thousand~~ ~~of annual fees, respectively, which were included in other noninterest income on the Consolidated Statement of Operations. The cash surrender value of the annuity contracts was $12.1 million~~ ~~and $12.4 million~~ at September 30, 2019 and December 31, 2018, respectively, and is included in other assets on the Consolidated Balance Sheets. For the three and nine months ended September 30, 2019, the Company recorded benefit expense accruals of $~~101 thousand~~ ~~and $303 thousand, respectively, for this post retirement benefit. For the three and nine months ended September 30, 2018, the Company recorded benefit expense accruals of $100 thousand~~ ~~and $586 thousand, respectively, for this post retirement benefit.~~

Upon death of a named executive, the annuity contract related to such executive terminates. The Bank has purchased additional bank owned life insurance contracts, which would effectively finance payments (up to a 15 ~~year certain amount) to the executives’ named beneficiaries.~~

~~Item~~ITEM 2 - ~~Management’s Discussion and Analysis of Financial Condition and Results of Operations~~MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF

OPERATIONS

The following discussion provides information about the results of operations, ~~and~~ financial condition, liquidity, and capital resources of ~~the Company~~Eagle Bancorp, Inc. (the “Company”) and its subsidiaries as of the dates and periods indicated. This discussion and analysis should be read in conjunction with the unaudited Consolidated Financial Statements and Notes thereto, appearing elsewhere in this report and the Management Discussion and Analysis in the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2018.~~

2019.

This report contains ~~forward looking~~forward-looking statements within the meaning of the Securities Exchange Act of 1934 (the “Exchange Act”), as amended, including statements of goals, intentions, and expectations as to future trends, plans, events or results of Company operations and policies and regarding general economic conditions. In some cases, ~~forward- looking~~forward-looking statements can be identified by use of words such ~~words~~ as “may,” “will,” ~~“anticipate,~~“can,” “anticipates,” “believes,” “expects,” “plans,” “estimates,” “potential,” ~~“continue,~~“assume," "probable," "possible," "continue,” “should,” “could,” “would,” “strive," "seeks," "deem," "projections" "forecast," "consider," "indicative," "uncertainty," "likely," "unknown," "attributable," "depends," "intends," "generally," "feel" "typically," "judgment," "subjective" and similar words or phrases. These statements are based upon current and anticipated economic conditions, nationally and in the Company’s market (including the macroeconomic and other challenges and uncertainties resulting from the coronavirus (“COVID-19”) pandemic, including on our credit quality and business operations), interest rates and interest rate policy, competitive factors and other conditions, which by their nature are not susceptible to accurate forecast, and are subject to significant uncertainty. For details on factors that could affect these expectations, see the risk factors contained in this report and the risk factors and other cautionary language included in the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2018~~2019, the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2020 and in other periodic and current reports filed by the Company with the Securities and Exchange Commission. Because of these uncertainties and the assumptions on which this discussion and the forward-looking statements are based, actual future operations and results in the future may differ materially from those indicated herein. Readers are cautioned against placing undue reliance on any such forward-looking statements. The Company’s past results are not necessarily indicative of future performance. All information is as of the date of this report. Any forward-looking statements made by or on behalf of the Company speak only as to the date they are made. Except to the extent required by applicable law or regulation, the Company undertakes no obligation to revise or update publicly any forward looking ~~statements.~~statement for any reason.

GENERAL

The Company is a growth-oriented, one-bank holding company headquartered in Bethesda, Maryland, which is currently celebrating ~~twenty-one~~twenty-two years of successful operations. The Company provides general commercial and consumer banking services through ~~the Bank,~~EagleBank (the “Bank”), its wholly owned banking subsidiary, a Maryland chartered bank which is a member of the Federal Reserve System. The Company was organized in October 1997, to be the holding company for the Bank. The Bank was organized in 1998 as an independent, community oriented, full service banking alternative to the super regional financial institutions, which dominate the Company’s primary market area. The Company’s philosophy is to provide superior, personalized service to its customers. The Company focuses on relationship banking, providing each customer with a number of services and becoming familiar with and addressing customer needs in a proactive, personalized fashion. The Bank currently has a total of twenty branch offices, including nine in Northern Virginia, six in Suburban Maryland, and five in Washington, D.C.

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The Bank offers a broad range of commercial banking services to its business and professional clients, as well as full service consumer banking services to individuals living and/or working primarily in the Bank’s market area. The Bank emphasizes providing commercial banking services to sole proprietors, small and medium-sized businesses, non-profit organizations and associations, and investors living and working in and near the primary service area. These services include the usual deposit functions of commercial banks, including business and personal checking accounts, “NOW” accounts and money market and savings accounts, business, construction, and commercial loans, residential mortgages and consumer loans, and cash management services. The Bank is also active in the origination and sale of residential mortgage loans and the origination of ~~SBA~~Small Business Administration ("SBA”) loans. The residential mortgage loans are originated for sale to third-party investors, generally large mortgage and banking companies, under best efforts and mandatory delivery commitments with the investors to purchase the loans subject to compliance with pre-established criteria. The Bank generally sells the guaranteed portion of the SBA loans in a transaction apart from the loan origination generating noninterest income from the gains on sale, as well as servicing income on the portion participated. The Company originates multifamily ~~FHA~~Federal Housing Administration ("FHA”) loans through the Department of Housing and Urban Development’s Multifamily Accelerated Program (“MAP”). The Company securitizes these loans through the Government National Mortgage Association (“Ginnie Mae”) MBS I program and sells the resulting securities in the open market to authorized dealers in the normal course of business, and periodically bundles and sells the servicing rights. Bethesda Leasing, LLC, a subsidiary of the Bank, holds title to and manages other real estate owned (“OREO”) assets. Eagle Insurance Services, LLC, a subsidiary of the Bank, offers access to insurance products and services through a referral program with a third party insurance broker. Additionally, the Bank offers investment advisory services through referral programs with third parties. Landroval Municipal Finance, Inc., a subsidiary of the Bank, focuses on lending to municipalities by buying debt on the public market as well as direct purchase issuance.

Impact of COVID-19

In March 2020, the outbreak of COVID-19 was recognized as a pandemic by the World Health Organization. The spread of COVID-19 has created a global public health crisis that has resulted in unprecedented uncertainty, volatility and disruption in financial markets and in governmental, commercial and consumer activity in the United States and globally, including the markets that we serve. Governmental responses to the pandemic have included orders closing nonessential businesses, directing individuals to restrict their movements, observe social distancing, and shelter in place. These actions, together with responses to the pandemic by businesses and individuals, have resulted in rapid decreases in commercial and consumer activity, temporary closures of many businesses that have led to a loss of revenues and a rapid increase in unemployment, material decreases in oil and gas prices and in business valuations, disrupted global supply chains, market downturns and volatility, changes in consumer behavior related to COVID-19 pandemic fears, related emergency response legislation and an expectation that Federal Reserve policy will maintain a low interest rate environment for the foreseeable future.

Our business and consumer customers are experiencing varying degrees of financial distress. In order to protect the health of our customers and employees, and to comply with applicable government directives, we have modified our business practices, including directing employees to work from home insofar as is possible and implementing our business continuity plans and protocols to the extent necessary.

On March 27, 2020, the CARES Act was signed into law. It contains substantial tax and spending provisions intended to address the impact of the COVID-19 pandemic. The CARES Act created the Paycheck Protection Program (the "PPP"), a new program designed to aid small- and medium-sized businesses through federally guaranteed loans distributed through banks. These loans are intended to guarantee eight weeks of payroll and other costs to help those businesses remain viable and allow their workers to pay their bills.

As an SBA preferred lender, the Bank is participating in the PPP program, and at June 30, 2020, had an outstanding balance of PPP loans of $456 million to just over 1,400 businesses. The average interest rate on these loans is 1.00% and the average yield, which includes fee amortization, was 2.91% for the second quarter of 2020.

There have also been various governmental actions taken or proposed to provide forms of relief, such as limiting debt collections efforts, including foreclosures, and encouraging or requiring extensions, modifications or forbearance, with respect to certain loans and fees. Governmental actions taken in response to the COVID-19 pandemic have not always been coordinated or consistent across jurisdictions but, in general, have been expanding in scope and intensity. The efficacy and ultimate effect of these actions is not known.

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In response to the COVID-19 pandemic, we have also implemented a short-term loan modification program to provide temporary payment relief to certain borrowers who meet the program's qualifications. Modifications under this program have predominantly been for a period of 90 days. The deferred payments along with interest accrued during the deferral period are due and payable on the maturity date of the existing loan. As of June 30, 2020, we granted temporary modifications on approximately 708 loans representing $1.63 billion (approximately 20% of total loans) in outstanding exposure. Through July 31, 2020, we granted approximately 724 temporary modifications representing approximately $1.65 billion in outstanding exposure, including 20 temporary modifications representing $14.5 million that subsequently returned to pre-modification terms.

Some of these deferrals may not have met the criteria for treatment under U.S. generally accepted accounting principles ("GAAP") as troubled debt restructurings ("TDRs"). Additionally, none of the deferrals are reflected in the Company's asset quality measures (i.e. non-performing loans) due to the provision of the CARES Act that permits U.S. financial institutions to temporarily suspend the U.S. GAAP requirements to treat such short-term loan modifications as TDR. Similar provisions have also been confirmed by interagency guidance issued by the federal banking agencies and confirmed with staff members of the Financial Accounting Standards Board.

Significant uncertainties as to future economic conditions exist, and we have taken deliberate actions in response, including maintaining record levels of on and off -balance sheet liquidity and have maintained well above well capitalized regulatory capital ratios. Furthermore, we suspended our share repurchase program during the first quarter of 2020. Accordingly, we made no share repurchases in the second quarter of 2020. The Board of Directors and management continue to monitor this area and may enter the markets from time to time as determined appropriate. Additionally, the economic pressures, coupled with the implementation of the expected loss methodology for determining our provision for credit losses as required by CECL, have contributed to an increased provision for credit losses for the first six months of 2020. We continue to monitor the impact of COVID-19 closely, as well as any effects that may result from the CARES Act and other legislative and regulatory developments related to COVID-19; however, the extent to which the COVID-19 pandemic will impact our operations and financial results during the remainder of 2020 is highly uncertain.

CRITICAL ACCOUNTING POLICIES

The Company’s Consolidated Financial Statements are prepared in accordance with GAAP and follow general practices within the banking industry. Application of these principles requires management to make estimates, assumptions, and judgments that affect the amounts reported in the financial statements and accompanying notes. These estimates, assumptions and judgments are based on information available as of the date of the Consolidated Financial Statements; accordingly, as this information changes, the Consolidated Financial Statements could reflect different estimates, assumptions, and judgments. Certain policies inherently have a greater reliance on the use of estimates, assumptions and judgments and, as such, have a greater possibility of producing results that could be materially different than originally reported. Estimates, assumptions, and judgments are necessary when assets and liabilities are required to be recorded at fair value, when a decline in the value of an asset not carried on the financial statements at fair value warrants an impairment write-down or a valuation reserve to be established, or when an asset or liability needs to be recorded contingent upon a future event. Carrying assets and liabilities at fair value inherently results in more financial statement volatility. The Company applies the accounting policies contained in Note 1 to Consolidated Financial Statements included in the Company’s Annual ~~report~~Report on Form 10-K for the year ended December 31, ~~2018.~~2019 and Note 1 to the Consolidated Financial Statements included in this report. There have been no significant changes to the Company’s ~~Accounting Policies~~accounting policies as disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2018~~2019 except as indicated below and in “Accounting Standards Adopted in ~~2019”~~2020” in Note 1 to the Consolidated Financial ~~Statements.~~Statements in this report.

Provision for Credit Losses and Provision for Unfunded Commitments

A consequence of lending activities is that we may incur credit losses, so we record an allowance for credit losses ("ACL") with respect to loan receivables and a reserve for unfunded commitments (“RUC”) as estimates of those losses. The amount of such losses will vary depending upon the risk characteristics of the loan portfolio as affected by economic conditions such as changes in interest rates, the financial performance of borrowers and unemployment rates.

As a result of our January 1, 2020, adoption of ASU No. 2016-13, “Measurement of Credit Losses on Financial Instruments,” and its related amendments, our methodology for estimating these credit losses changed significantly from December 31, 2019. The standard replaced the “incurred loss” approach with an “expected loss” approach known as CECL. The CECL approach requires an estimate of the credit losses expected over the life of an exposure (or pool of exposures). It removes the incurred loss approach’s threshold that delayed the recognition of a credit loss until it was “probable” a loss event was “incurred.”

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The estimate of expected credit losses under the CECL approach is based on relevant information about past events, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amounts. Historical loss experience is generally the starting point for estimating expected credit losses. We then consider whether the historical loss experience should be adjusted for asset-specific risk characteristics or current conditions at the reporting date that did not exist over the period from which historical experience was used. Finally, we consider forecasts about future economic conditions that are reasonable and supportable. The RUC represents the expected credit losses on off-balance sheet commitments such as unfunded commitments to extend credit and standby letters of credit. The RUC is determined by estimating future draws and applying the expected loss rates on those draws.

Management has significant discretion in making the judgments inherent in the determination of the provision and allowance for credit losses and the RUC. Our determination of the amount of the allowance for credit losses requires significant reliance on the credit risk rating we assign to individual borrowers, the use of estimates and significant judgment as to the amount and timing of expected future cash flows on loans, significant reliance on historical loss rates on homogenous portfolios, consideration of our quantitative and qualitative evaluation of economic factors, and the reliance on our reasonable and supportable forecasts. The Company uses the discounted cash flow (“DCF”) method to estimate expected credit losses for the commercial, income producing – commercial real estate, owner occupied – commercial real estate, real estate mortgage – residential, construction – commercial and residential, construction – C&I (owner occupied), home equity, and other consumer loan pools. For each of these loan segments, the Company generates cash flow projections at the instrument level wherein payment expectations are adjusted for estimated prepayment speed, probability of default, and loss given default. The modeling of expected prepayment speeds are based on historical internal data. The Company uses regression analysis of historical internal and peer data to determine suitable loss drivers to utilize when modeling lifetime probability of default. This analysis also determines how expected probability of default and loss given default will react to forecasted levels of the loss drivers. For all loan pools utilizing the DCF method, management utilizes and forecasts national unemployment as an initial loss driver, which is next adjusted to estimate regional unemployment rates. For all DCF models, management has determined that eight quarters represents a reasonable and supportable forecast period and reverts back to a historical loss rate over twelve months on a straight-line basis. Management leverages economic projections from reputable and independent third parties to inform its loss driver forecasts over the forecast period. PPP loans are included in the model but do not carry a reserve, as these loans are fully guaranteed as to principal and interest by the SBA, whose guarantee is backed by the full faith and credit of the U.S. Government.

The allowance for credit losses attributable to each portfolio segment also includes an amount for inherent risks not reflected in the historical analyses. Relevant factors include, but are not limited to, concentrations of credit risk, changes in underwriting standards, experience and depth of lending staff, and trends in delinquencies. While our methodology in establishing the reserve for credit losses attributes portions of the ACL and RUC to the commercial and consumer portfolio segments, the entire ACL and RUC is available to absorb credit losses inherent in the total loan portfolio and total amount of unfunded credit commitments, respectively.

Going forward, the impact of utilizing the CECL approach to calculate the reserve for credit losses will be significantly influenced by the composition, characteristics and quality of our loan portfolio, as well as the prevailing economic conditions and forecasts utilized. Material changes to these and other relevant factors may result in greater volatility to the reserve for credit losses, and therefore, greater volatility to our reported earnings. For example, the COVID-19 pandemic has negatively impacted unemployment projections, which inform our CECL economic forecast and increased our loss reserve as of June 30, 2020. See Notes 1 and 5 to the Consolidated Financial Statements, the “Provision for Credit Losses” section in Management’s Discussion and Analysis, and the COVID-19 risk factors in Item 1A for more information on the provision for credit losses.

Goodwill

As of June 30, 2020 COVID-19 caused the occurrence of what management deemed to be a triggering event that caused us to perform a goodwill impairment test to determine if an impairment charge was required for that period. Determining the fair value of a reporting unit under the goodwill impairment test involves judgement and often involves the use of significant estimates and assumptions. Estimates of fair value are primarily determined using discounted cash flows, market comparisons and recent transactions. These approaches use significant estimates and assumptions including projected future cash flows, discount rates reflecting the market rate of return, projected growth rates and determination and evaluation of appropriate market comparables. Based on the results of the assessment of all reporting units, the Company concluded that no impairment existed as of June 30, 2020. However, future events could cause the Company to conclude that goodwill or other intangibles have become impaired, which would result in recording an impairment loss. Any resulting impairment loss could have a material adverse impact on the Company's financial condition and results of operations.

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RESULTS OF OPERATIONS

Earnings Summary

Net income for the three months ended ~~September~~June 30, ~~2019~~2020 was ~~$36.5~~$28.9 million compared to ~~$38.9~~$37.2 million net income for the three months ended ~~September~~June 30, ~~2018,~~2019, a 6%23% decrease. Net income per basic ~~common share for the three months ended September 30, 2019 was $1.07 compared to $1.14 for the same period in 2018, a 6% decrease. Net income per~~and diluted common share for the three months ended ~~September~~June 30, ~~2019~~2020 was ~~$1.07~~$0.90 compared to ~~$1.13~~$1.08 per basic and diluted common share for the same period in ~~2018,~~2019, a 5%17% decrease.

Net income declined for the three months ended ~~September~~June 30, ~~2019~~2020 relative to the same period in ~~2018~~2019 due substantially to increased provisioning for credit losses offset by higher noninterest income (as discussed below). In particular, the provision for credit losses increased to $19.7 million for the three months ended June 30, 2020 compared to $3.6 million for the same period in 2019, a 448% increase, as the Company implemented CECL effective January 1, 2020 and increased reserves associated with the impact of COVID-19. See Note 1 and Note 5 for further detail on CECL.

The provision for income taxes for the three months ended June 30, 2020 was $9.4 million, a decrease of $4.1 million, or 30%, compared to the same period in 2019. The decrease in income taxes was primarily due to ~~slightly higher revenues~~a significant decline in pre-tax income for the three months ended June 30, 2020 compared to the three months ended June 30, 2019 due to increased credit reserves significantly attributable to COVID-19, and a decrease in disallowed compensation deductions for key executives, mainly related to share based compensation awards and other compensation of our former CEO and Chairman who resigned in March 2019.

The most significant portion of revenue (i.e. net interest income plus noninterest income) offset by a larger increase in noninterest expenses in the 2019 period. Furthermore, earnings in the third quarter of 2019 were impacted by two significant non-recurring expense items. First, the Company recorded $2.0 million of accelerated shared based compensation expense due to the resignation of certain directors of the Company and Bank. Second, as a result of the FDIC Deposit Insurance Fund exceeding 1.38% of insured deposits at June 30, 2019, EagleBank recognized a $1.1 million credit to its FDIC assessment expense in the third quarter of 2019. Excluding these two non-recurring items, net income for the third quarter of 2019 would have been $37.1 million ($1.08 per diluted share).

~~The provision for income taxes was $14.1 million, an increase of $221 thousand, or 2%, compared to the same period in 2018. The most significant portion of revenue~~ is net interest income, which ~~decreased by less than 1%~~remained relatively stable for the three months ended ~~September~~June 30, ~~2019~~2020 over the same period in ~~2018~~2019 ($~~81.0~~81.4 million ~~versus~~as compared to $81.3 million).

This was largely attributable to the growth in average earning assets effectively offset by a decline in the net interest margin.

For the three months ended ~~September~~June 30, ~~2019,~~2020, the Company reported an annualized return on average assets (“ROAA”) of ~~1.62%~~1.12% as compared to ~~1.93%~~1.74% for the three months ended ~~September~~June 30, ~~2018.~~2019. Total shareholders’ equity was $1.19 billion at both June 30, 2020 and December 31, 2019, a decrease of less than 1%. The annualized return on average common equity (“ROACE”) for the three months ended ~~September~~June 30, ~~2019~~2020 was ~~12.09%~~9.84% as compared to ~~14.85%~~12.81% for the three months ended ~~September~~June 30, ~~2018.~~2019. The annualized return on average tangible common equity (“ROATCE”) for the three months ended ~~September~~June 30, ~~2019~~2020 was ~~13.25%~~10.80% as compared to ~~16.54%~~14.08% for the three months ended ~~September~~June 30, ~~2018.~~2019. Refer to the “Use of Non-GAAP Financial Measures” section for additional detail and a reconciliation of GAAP to non-GAAP financial measures. The decline in these ratios was primarily due to the implementation of CECL and COVID-19 impacts and to a lower net interest margin compression, the net impact of the two non-recurring expense items discussed above, as well as additional legal costs associated with ongoing investigations discussed in the “Noninterest Expense” section.margin.

For the nine months ended September 30, 2019, the Company’s net income was $107.5 million, a 4% decrease from $112.0 million net income for the same period in 2018. Net income per basic common share for the nine months ended September 30, 2019 was $3.12 compared to $3.26 for the same period in 2018, a 4% decrease. Net income per diluted common share for the nine months ended September 30, 2019 was $3.12 compared to $3.25 for the same period in 2018, a 4% decrease.

The decrease in net income for the nine months ended September 30, 2019 can be attributed primarily to $8.2 million of nonrecurring charges related to acceleration of share based compensation expenses associated with the retirement of our former Chairman and Chief Executive Officer and the resignation of certain directors. The provision for income taxes was $39.5 million, an increase of $796 thousand or 2% compared to the same period in 2018. The most significant portion of revenue is net interest income, which increased 3% for the nine months ended September 30, 2019 over the same period in 2018 ($243.3 million versus $235.3 million), resulting from growth in average earning assets of 11% partially offset by a decline in the net interest margin to 3.88% from 4.15%.

For the nine months ended September 30, 2019, the Company reported an annualized ROAA of 1.66% as compared to 1.92% for the nine months ended September 30, 2018. The annualized ROACE for the nine months ended September 30, 2019 was 12.34% as compared to 14.92% for the nine months ended September 30, 2018. The annualized ROATCE for the nine months ended September 30, 2019 was 13.57% as compared to 16.70% for the nine months ended September 30, 2018. The decline in these ratios was primarily due to net interest margin compression and the nonrecurring charges related to acceleration of share based compensation expenses discussed above.

The net interest margin, which measures the difference between interest income and interest expense (i.e. net interest income) as a percentage of earning assets, was ~~3.72%~~3.26% for the three months ended ~~September~~June 30, ~~2019~~2020 and ~~4.14%~~3.91% for the same period in ~~2018.~~2019. Average earning asset yields decreased 21130 basis points to ~~5.00%~~3.91% for the three months ended ~~September~~June 30, ~~2019,~~2020, as compared to 5.21% for the same period in ~~2018.~~2019. The average cost of interest bearing liabilities ~~increased~~decreased by 27105 basis points (to ~~2.02%~~1.01% from ~~1.75%~~2.06%) for the three months ended ~~September~~June 30, ~~2019~~2020 as compared to the same period in ~~2018.~~2019. Combining the change in the yield on earning assets and the costs of interest bearing liabilities, the net interest spread decreased by 4825 basis points for the three months ended ~~September~~June 30, ~~2019~~2020 as compared to ~~2018 (2.98% versus 3.46%~~2019 (2.90% as compared to 3.15%).

The benefit of noninterest sources funding earning assets ~~increased~~decreased by 640 basis points to 7436 basis points from 6876 basis points for the three months ended ~~September~~June 30, ~~2019 versus~~2020 as compared to the same period in ~~2018.~~2019, due to significantly lower market interest rates. The combination of a 4825 basis point decrease in the net interest spread and a 640 basis point ~~increase~~decrease in the value of noninterest sources resulted in a 4265 basis point decrease in the net interest margin for the three months ended ~~September~~June 30, ~~2019~~2020 as compared to the same period in ~~2018.~~ 2019.

The provision for credit losses was $19.7 million for the three months ended June 30, 2020 as compared to $3.6 million for the three months ended June 30, 2019. The higher provisioning in the second quarter of 2020, as compared to the second quarter of 2019, is primarily due to the implementation of the CECL accounting standard for loan loss allowances, as well as COVID-19 impacts and higher net charge-offs primarily related to COVID-19 effects. Net charge-offs of $7.1 million in the second quarter of 2020 represented an annualized 0.36% of average loans, excluding loans held for sale, as compared to $1.5 million, or an annualized 0.08% of average loans, excluding loans held for sale, in the second quarter of 2019. Net charge-offs in the second quarter of 2020 were attributable primarily to one commercial relationship to a personal services company that ceased business operations as a result of COVID-19.

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At June 30, 2020 the allowance for credit losses represented 1.36% of loans outstanding, as compared to 0.98% at December 31, 2019. The allowance for credit losses represented 185% of nonperforming loans at June 30, 2020, as compared to 151% at December 31, 2019. The higher coverage ratio was due to an increase in the allowance at June 30, 2020, substantially due to the implementation of CECL and the impact of COVID-19 on our expected future credit losses.

Total noninterest income for the three months ended June 30, 2020 increased to $12.5 million from $6.4 million for the three months ended June 30, 2019, a 96% increase. Service charges on deposits for the three months ended June 30, 2020 decreased to $942 thousand from $1.6 million for the three months ended June 30, 2019, a 41% decrease, due to lesser insufficient funds fees. Gain on sale of loans for the three months ended June 30, 2020 increased to $3.1 million from $1.9 million for the three months ended June 30, 2019, a 60% increase, due to higher gains on the sale of residential mortgage loans ($1.2 million). Other income for the three months ended June 30, 2020 increased to $6.9 million from $1.8 million for the three months ended June 30, 2019, a 277% increase, due substantially to higher gains associated with the origination, securitization, sale and servicing of FHA loans ($2.5 million), $1.4 million higher small business investment company (“SBIC”) income related to a Community Reinvestment Act (“CRA”) qualified investment fund, $921 thousand higher swap fee income, and $591 thousand higher prepayment fees. Net investment gains on sale were $713 thousand for the three months ended June 30, 2020 compared to $563 thousand for the same period in 2019. Residential mortgage loans closed were $308 million for the second quarter of 2020 as compared to $152 million for the second quarter of 2019.

The efficiency ratio, which measures the ratio of noninterest expense to total revenue, was 37.18% for the second quarter of 2020, as compared to 38.04% for the second quarter of 2019. Noninterest expenses totaled $34.9 million for the three months ended June 30, 2020, as compared to $33.4 million for the three months ended June 30, 2019, a 5% increase.

Salaries and employee benefits were $17.1 million for the three months ended June 30, 2020, as compared to $17.7 million for the same period in 2019, a decrease of $639 thousand or 4%.

Data processing expenses were $2.8 million for the three months ended June 30, 2020 compared to $2.6 million for the same period in 2019, a 6% increase.

Legal, accounting and professional fees increased $1.2 million for the three months ended June 30, 2020 compared to the three months ended June 30, 2019. The reasons for the decrease in salaries and employee benefits and the increase in legal, accounting and professional fees for the periods noted above are discussed in the “Noninterest Expense” section.

FDIC expenses were $2.0 million for the three months ended June 30, 2020 compared to $1.1 million for the same period in 2019, a 76% increase, due to a higher assessment base resulting from growth in total assets.

Other expenses were $4.5 million for the three months ended June 30, 2020 compared to $4.2 million for the same period in 2019, a 6% increase, due primarily to $940 thousand higher other real estate owned ("OREO") expense offset by lower broker fees ($497 thousand).

Net income for the six months ended June 30, 2020 was $52.0 million compared to $71.0 million for the six months ended June 30, 2019, a 27% decrease. Net income per basic common share for the six months ended June 30, 2020 was $1.60 compared to $2.06 per basic common share for the same period in 2019, a 22% decrease. Net income per diluted common share for the six months ended June 30, 2020 was $1.60 compared to $2.05 per diluted common share for the same period in 2019, a 22% decrease.

Net income declined for the six months ended June 30, 2020 relative to the same period in 2019 due substantially to increased provisioning for credit losses offset by higher noninterest income (as discussed below). In particular, the provision for credit losses increased to $34.0 million for the six months ended June 30, 2020 compared to $7.0 million for the same period in 2019, a 389% increase, as the Company ~~considers~~implemented CECL effective January 1, 2020 and increased reserves associated with the ~~value~~impact of ~~its noninterest sources~~COVID-19 through the second quarter of ~~funds~~2020. See Note 1 and Note 5 for further detail on CECL.

The provision for income taxes was $17.8 million for the six months ended June 30, 2020, a decrease of $7.6 million, or 30%, compared to the same period in 2019. The decrease was primarily due to a significant decline in pre-tax income for the six months ended June 30, 2020 compared to the six months ended June 30, 2019, and a decrease in disallowed compensation deductions for key executives, mainly related to share based compensation awards and other compensation of our former CEO and Chairman who resigned in March 2019. The decrease in the effective income tax rate was recorded in the second quarter of 2020 based on a reduced pre-tax income budget for the year due to increased credit reserves significantly attributable to COVID-19.

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Net interest income decreased by less than 1% for the six months ended June 30, 2020 over the same period in 2019 ($161.1 million as ~~very significant~~compared to ~~its business model~~$162.3 million). This was largely attributable to growth in average earning assets effectively offset by a decline in the net interest margin.

For the six months ended June 30, 2020, the Company reported an annualized ROAA of 1.06% as compared to 1.68% for the six months ended June 30, 2019. The annualized ROACE for the six months ended June 30, 2020 was 8.82% as compared to 12.47% for the six months ended June 30, 2019. The annualized ROATCE for the six months ended June 30, 2020 was 9.67% as compared to 13.73% for the six months ended June 30, 2019. Refer to the "Use of Non-GAAP Financial Measures" section for additional detail and ~~its overall profitability.~~

a reconciliation of GAAP to non-GAAP financial measures. The decline in these ratios was primarily due to the implementation of CECL and COVID-19 impacts and to a lower net interest margin.

The net interest margin was ~~3.88%~~3.36% for the ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 and ~~4.15%~~3.97% for the same period in ~~2018.~~2019. Average earning asset yields ~~increased 6~~decreased 100 basis points to ~~5.14%~~4.21% for the ~~nine~~six months ended ~~September~~June 30, ~~2019,~~2020, as compared to ~~5.08%~~5.21% for the same period in ~~2018.~~2019. The average cost of interest bearing liabilities ~~increased~~decreased by 5270 basis points (to ~~2.02%~~1.31% from ~~1.50%)~~2.01)% for the ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 as compared to the same period in ~~2018.~~2019. Combining the change in the yield on earning assets and the costs of interest bearing liabilities, the net interest spread decreased by 4625 basis points for the ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 as compared to ~~2018 (3.12% versus 3.58%)~~2019 (2.90% as compared to 3.20)%.

The benefit of noninterest sources funding earning assets ~~increased~~decreased by 1931 basis points to 7646 basis points from 5777 basis points for the ~~nine~~six months ended ~~September~~June 30, ~~2019 versus~~2020 as compared to the same period in ~~2018.~~2019 due to significantly lower market interest rates. The combination of a 4630 basis point decrease in the net interest spread and a 1931 basis point ~~increase~~decrease in the value of noninterest sources resulted in a 2761 basis point decrease in the net interest margin for the ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 as compared to the same period in ~~2018.~~

2019. Despite currently having lesser value resulting from lower interest rates, the Company continues to consider the value of its noninterest sources of funds as very significant to its business model and its overall profitability over the longer term.

The Company believes it has effectively managed its ~~net interest margin and shown some growth in~~ net interest income over the past twelve months as market interest rates have trended sharply lower. This factor has been significant to overall earnings performance over the past twelve months as net interest income represents ~~93%~~87% of the ~~Company’s~~Company's total revenue for the three months ended ~~September~~June 30, ~~2019.~~

2020.

For the first ~~nine~~six months ~~of 2019,~~ended June 30, 2020, total loans grew 8%6% over December 31, ~~2018,~~2019, and average loans were ~~11%~~10% higher in the first ~~nine~~six months of ~~2019~~2020 as compared to the first ~~nine~~six months of ~~2018.~~2019. At ~~September~~June 30, ~~2019,~~2020, total deposits were 6%10% higher than deposits at December 31, ~~2018,~~2019, while average deposits were ~~13%~~17% higher for the first ~~nine~~six months of ~~2019~~2020 compared with the first ~~nine~~six months of ~~2018.~~

2019.

In order to fund growth in average loans of ~~11%~~10% over the ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 as compared to the same period in ~~2018,~~2019, as well as sustain significant liquidity, the Company has relied on funding from interest bearing accounts primarily as a result of ~~effectively building new and enhanced client~~inflows from certain financial intermediary relationships ~~and an enhanced focus on time deposits.~~

as their clients moved to a more significant cash position in light of COVID-19 concerns.

In terms of the average asset composition or mix, loans, which generally have higher yields than securities and other earning assets, represented ~~87%~~81% and ~~86%~~87% of average earning assets for the first ~~nine~~six months of ~~2019~~2020 and ~~2018,~~2019, respectively. For the first ~~nine~~six months of ~~2019,~~2020, as compared to the same period in ~~2018,~~2019, average loans, excluding loans held for sale, increased ~~$715.0~~$683.1 million, or ~~11%~~10%, due primarily to growth in income producing - commercial real estate, ~~owner occupied -~~ commercial ~~real estate,~~ and ~~commercial~~PPP loans. Average investment securities for ~~both~~ the ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 and ~~2018~~2019 amounted to 9%2% and 3% of average earning ~~assets.~~assets, respectively. The combination of federal funds sold, interest bearing deposits with other banks and loans held for sale represented 4%10% and 5%4% of average earning assets for the first ~~nine~~six months of 2020 and 2019, ~~and 2018,~~ respectively.

The provision for credit losses was ~~$3.2~~$34.0 million for the ~~three~~six months ended ~~September~~June 30, ~~2019~~2020 as compared to ~~$2.4~~$7.0 million for the ~~three~~six months ended ~~September~~June 30, ~~2018.~~2019. The higher provisioning for the six months ended June 30, 2020, as compared to the same period in 2019, is primarily due to the implementation of CECL and the impact of COVID-19 on our actual and expected future credit losses. Net charge-offs of ~~$1.5~~$9.4 million infor the ~~third quarter of 2019~~six months ended June 30, 2020 represented an annualized ~~0.08%~~0.24% of average loans, excluding loans held for sale, as compared to $862 thousand, or an annualized 0.05% of average loans, excluding loans held for sale, in the third quarter of 2018. Net charge-offs in the third quarter of 2019 were attributable primarily to commercial loans ($1.6 million).

At September 30, 2019 the allowance for credit losses represented 0.98% of loans outstanding, as compared to 1.00% at December 31, 2018. The allowance for credit losses at September 30, 2019 represented 128% of nonperforming loans, as compared to 430% at December 31, 2018. Nonperforming loans of $57.7 million as of September 30, 2019 included one loan of $16.5 million which was brought current shortly after quarter end. Excluding a $16.5 million nonperforming loan that was brought current shortly after quarter end, the coverage ratio would have been 179% as of September 30, 2019. The lower coverage ratio was due to an increase in nonperforming loans at September 30, 2019, substantially attributable to softness in the market for ultra high-end residential properties.

Total noninterest income for the three months ended September 30, 2019 increased to $6.3 million from $5.6 million for the three months ended September 30, 2018, a 12% increase, due substantially to $1.1 million higher gains on the sale of residential mortgage loans ($2.5 million versus $1.4 million) resulting from higher loan origination and sales volume as compared to 2018, partially offset by lower service charges on deposit accounts of $320 thousand. Residential mortgage loans closed were $224 million for the third quarter of 2019 versus $107 million for the third quarter of 2018.

The efficiency ratio, which measures the ratio of noninterest expense to total revenue, was 38.34% for the third quarter of 2019, as compared to 36.37% for the third quarter of 2018. Noninterest expenses totaled $33.5 million for the three months ended September 30, 2019, as compared to $31.6 million for the three months ended September 30, 2018, a 6% increase. Salaries and employee benefits expense increased by $1.9 million due primarily to $2.0 million of non-recurring charges related to the acceleration of share based compensation expense. Legal, accounting and professional fees increased $1.5 million from $2.1 million to $3.6 million, as discussed in the “Noninterest Expense” section. Data processing expense decreased by $240 thousand primarily due to ongoing contract renegotiations. FDIC insurance decreased $848 thousand from $933 thousand to $85 thousand as the increased premium cost of a higher assessment base was effectively offset by the $1.1 million FDIC assessment credit detailed in the “Earnings Summary” section.

The provision for credit losses was $10.1 million for the nine months ended September 30, 2019 as compared to $6.1 million for the nine months ended September 30, 2018. The higher provisioning for the nine months ended September 30, 2019, as compared to the same period in 2018, is due primarily to higher net charge-offs. Net charge-offs of $6.4 million for the nine months ended September 30, 2019 represented an annualized 0.12% of average loans, excluding loans held for sale, as compared to $2.6$4.8 million, or an annualized ~~0.05%~~0.13% of average loans, excluding loans held for sale, in the first ~~nine~~six months of ~~2018.~~2019. Net charge-offs in the first ~~nine~~six months of ~~2019~~2020 were attributable to commercial loans ($7.1 million) and commercial real estate loans ($~~5.0 million) and commercial loans ($1.4~~2.3 million).

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Total noninterest income for the ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 increased to ~~$19.0~~$18.0 million from ~~$16.5~~$12.7 million for the ~~nine~~six months ended ~~September~~June 30, ~~2018,~~2019, a ~~15%~~42% increase. Service charges on deposits for the six months ended June 30, 2020 decreased to $2.4 million from $3.3 million for the six months ended June 30, 2019, a 28% decrease, due to lesser insufficient funds fees. Gain on sale of loans for the six months ended June 30, 2020 increased to $4.0 million from $3.3 million for the six months ended June 30, 2019, a 22% increase, due ~~substantially~~ to ~~$1.6 million higher gains on the sale of investment securities primarily due to $829 thousand of noninterest income recognized during March 2019 on interest rate swap terminations, and $1.4 million~~ higher gains on the sale of residential mortgage loans ($~~5.7~~718 thousand). Residential lending gains for the first six months of 2020 are net of $2.6 million ~~versus $4.3~~in hedge and mark to market losses incurred during the first quarter of 2020 attributable to the Federal Reserve’s market actions negatively impacting mortgage backed securities pricing combined with sharp declines in servicing right valuations associated with investor uncertainty surrounding COVID-19 at the end of March. Other income for the six months ended June 30, 2020 increased to $8.8 million from $3.7 million for the six months ended June 30, 2019, a 137% increase due substantially to higher gains associated with the origination, securitization, sale and servicing of FHA loans ($2.5 million) ~~resulting from~~, $1.4 million higher ~~volume as compared~~SBIC income related to ~~2018, offset by $394~~a CRA qualified investment fund, $1.1 million higher swap fee income, and $380 thousand ~~lower service charges on deposit accounts.~~higher prepayment fees. Net investment gains were $1.5 million for both the six months ended June 30, 2020 and 2019. Residential mortgage loans closed were ~~$470~~$501 million for the ~~nine~~first six months of 2020 as compared to $246 million for the first six months of 2019.

For the first six months of 2020, the efficiency ratio was 40.34% as compared to 40.95% for the same period in 2019.

Noninterest expenses totaled $72.2 million for the six months ended ~~September~~June 30, 2020, as compared to $71.7 million for the six months ended June 30, 2019, ~~versus $334~~a 1% increase. Noninterest expenses in 2020 periods increased slightly from the 2019 amounts primarily because of increased legal expenses. This increase was almost entirely offset by not having the nonrecurring costs related to the former CEO retirement that were present in the 2019 period.

Salaries and employee benefits were $34.9 million for the six months ended June 30, 2020, as compared to $41.4 million for the same period in ~~2018.~~

~~The efficiency ratio, which measures the ratio~~2019, a decrease of ~~noninterest expense to total revenue, was 40.08% for the first nine months of 2019, as compared to 37.74% for the same period in 2018. Noninterest expenses totaled $105.1~~$6.5 million for the nine months ended September 30, 2019, as compared to $95.0 million for the nine months ended September 30, 2018, an 11% increase. Cost increases for salaries and benefits for the nine months ended September 30, 2019 were $8.7 million, due primarily to $8.2 million of nonrecurring charges related to acceleration of share based compensation expenses associated with the retirement of our former Chairman and Chief Executive Officer and the resignation of certain directors.or 16%. Legal, accounting and professional fees increased ~~by $792 thousand from $7.3~~$6.5 million for the six months ended June 30, 2020 compared to ~~$8.1 million,~~ the ~~reasons of which~~six months ended June 30, 2019. The reason for the decrease in salaries and employee benefits and increase in legal, accounting and professional fees for the periods noted above are further discussed in the “Noninterest Expense” section.

Data processing expenses were $5.3 million for the six months ended June 30, 2020 compared to $5.0 million for the same period in 2019, a 6% increase.

FDIC expenses were $3.4 million for the six months ended June 30, 2020 compared to $2.2 million for the same period in 2019, a 52% increase, due to a higher assessment base resulting from growth in total assets.

Other expenses ~~increased $1.4~~were $8.2 million for the six months ended June 30, 2020 compared to $8.7 million over the same period ended June 30, 2019, a 5% decrease, due primarily to lower broker fees ($1.6 million) partially offset by $940 thousand higher other real estate ~~and utility costs on special assets ($441 thousand) and director compensation ($424 thousand).~~

owned (“OREO”) expense.

The ratio of common equity to total assets decreased to ~~13.16%~~12.12% at ~~September~~June 30, ~~2019~~2020 from ~~13.22%~~13.25% at December 31, ~~2018,~~2019, due ~~primarily~~ to total assets growing faster than ~~retained earnings, which were reduced by~~common equity, including common equity reductions due to $44 million in share repurchase activity, the ~~two non-recurring items~~approximately $11 million charge to common equity due to implementation of CECL on January 1, 2020, and COVID-19’s impact on our loan loss provisioning as discussed in the “Earnings Summary” ~~section.~~above. As discussed later in “Capital Resources and Adequacy,” the regulatory capital ratios of the Bank and Company remain above well capitalized levels.

Net Interest Income and Net Interest Margin

Net interest income is the difference between interest income on earning assets and the cost of funds supporting those assets. Earning assets are composed primarily of loans and investment securities. The cost of funds represents interest expense on deposits, customer repurchase agreements and other borrowings. Noninterest bearing deposits and capital are other components representing funding sources (refer to discussion above under Results of Operations). Changes in the volume and mix of assets and funding sources, along with the changes in yields earned and rates paid, determine changes in net interest income.

~~For~~Net interest income was $81.4 million for the three months ended ~~September~~June 30, ~~2019,~~2020 and $81.3 million for the same period in 2019. The lack of growth was primarily the result of lesser average yields on loans (4.63% as compared to 5.61%) effectively offset by growth in average earning assets of 21%. The addition of the PPP loans at an average yield of 2.91% for the quarter negatively impacted the overall yield of the total loan portfolio by approximately seven basis points.

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For the six months ended June 30, 2020, net interest income decreased by ~~less than 1%,~~$1.2 million, average loans increased by ~~$846.6~~$683.1 million, and average deposits increased by ~~$834.2 million~~$1.15 billion over the same period for ~~2018.~~ 2019. The addition of the PPP loans at an average yield of 2.91% for the six months ended June 30, 2020 negatively impacted the overall yield of the total loan portfolio by approximately four basis points.

The net interest margin was ~~3.72%~~3.26% for the second quarter of 2020 and 3.91% for the second quarter of 2019. In the second quarter of 2020, as average U.S. Treasury rates in the two to five year range declined significantly by about 80-90 basis points and the average yield curve remained fairly flat, we experienced 23 basis points of net interest margin compression (from 3.49% to 3.26%) as compared to the first quarter of 2020. In addition, our cost of funds declined 65 basis points (from 1.30% to 0.65%), while the yield on earning assets declined by 130 basis points (from 5.21% to 3.91%). At June 30, 2020, the Bank had $456 million of outstanding PPP loans with an average rate of 1.00% and an average yield, which includes fee amortization, of 2.91% for the second quarter of 2020. The lower loan yield on these PPP loans negatively affected second quarter loan portfolio yields by seven basis points. Substantially higher average liquidity in the second quarter compared to the first quarter of 2020 contributed to the net interest margin compression as average deposit growth outweighed average loan growth. For the three months ended ~~September~~June 30, ~~2019 and 4.14% for the same period in 2018.~~

~~For the nine months ended September 30, 2019, net interest income increased 3%,~~2020, average loans increased by ~~$715.0~~$754.9 million and average deposits increased by ~~$794.2 million~~$1.59 billion over the same period for ~~2018.~~ 2019. Average liquidity for the second quarter was $1.1 billion as compared to $229 million for the second quarter of 2019. The yield on our substantial level of variable rate loans was negatively impacted by the much lower interest rate environment in the second quarter of 2020, including a 105 basis point decline in the average one-month LIBOR rate. A substantial portion of the variable rate loans portfolio has interest rate floors which cushioned the decline in loan yields.

The net interest margin was ~~3.88%~~3.36% for the ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 and ~~4.15%~~3.97% for the same period in ~~2018.~~ 2019.

The ~~Company believes its current net~~low interest ~~margin remains favorable compared~~rate environment in the second quarter of 2020 reduced interest income on floating-rate commercial loans as well as liquid assets and reduced depositor expectations concerning deposit rates. Because of the need to ~~peer banking companies.~~

maintain higher levels of liquidity and delays in business investment activity due to COVID-19 disruptions, interest rates and margins can be expected to remain low. As business conditions adjust to the new operating environment, deposit competition is expected to be more of a factor in influencing deposit rates than it was in the period immediately following the COVID-19 outbreak.

The tables below ~~present~~presents the average balances and rates of the major categories of the Company’s assets and liabilities for the three and ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 and ~~2018.~~2019. Included in the ~~table is a measurement~~tables are measurements of interest rate spread and margin. Interest rate spread is the difference (expressed as a percentage) between the interest rate earned on earning assets less the interest rate paid on interest bearing liabilities. While the interest rate spread provides a quick comparison of earnings rates versus cost of funds, management believes that margin provides a better measurement of performance. The net interest margin (as compared to net interest spread) includes the effect of noninterest bearing sources in its calculation. Net interest margin is net interest income expressed as a percentage of average earning assets.

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Eagle Bancorp, Inc.

Consolidated Average Balances, Interest Yields And Rates (Unaudited)

(dollars in thousands)

	Three Months Ended September 30,
	2019							2018
	Average Balance		Interest		Average Yield/Rate			Average Balance		Interest		Average Yield/Rate

															Three Months Ended June 30,
															2020						2019
															Average				Average		Average				Average
															Balance		Interest		Yield/Rate		Balance		Interest		Yield/Rate
ASSETS
Interest earning assets:
Interest bearing deposits with other banks and other short-term investments	$	344,853	$	1,762		2.03	%	$	377,324	$	1,897		1.99	%	$	1,102,931	$	161	0.06	%	$	209,096	$	1,105	2.12	%
Loans held for sale (1)		49,765		492		3.95	%		23,511		274		4.66	%		80,227		686	3.42	%		34,760		349	4.02	%
Loans (1) (2)		7,492,816		101,805		5.39	%		6,646,264		95,296		5.69	%		8,015,751		92,242	4.63	%		7,260,899		101,540	5.61	%
Investment securities available for sale (2)		741,907		4,904		2.62	%		735,586		4,875		2.63	%		821,340		4,571	2.24	%		803,207		5,238	2.62	%
Federal funds sold		25,855		71		1.09	%		10,737		18		0.67	%		36,251		12	0.13	%		20,361		47	0.93	%
Total interest earning assets		8,655,196		109,034		5.00	%		7,793,422		102,360		5.21	%		10,056,500		97,672	3.91	%		8,328,323		108,279	5.21	%


Total noninterest earning assets		341,452							297,815							373,842						337,172
Less: allowance for credit losses		73,242							67,702							103,633						69,972
Total noninterest earning assets		268,210							230,113							270,209						267,200
TOTAL ASSETS	$	8,923,406						$	8,023,535						$	10,326,709					$	8,595,523


LIABILITIES AND SHAREHOLDERS’ EQUITY
Interest bearing liabilities:
Interest bearing transaction	$	791,785	$	1,828		0.92	%	$	482,820	$	973		0.80	%	$	801,508	$	530	0.27	%	$	705,628	$	1,197	0.68	%
Savings and money market		2,922,751		13,606		1.85	%		2,596,010		9,636		1.47	%		3,914,916		5,608	0.58	%		2,628,255		12,279	1.87	%
Time deposits		1,444,328		9,142		2.51	%		1,220,755		6,110		1.99	%		1,199,946		6,376	2.14	%		1,442,197		8,985	2.50	%
Total interest bearing deposits		5,158,864		24,576		1.89	%		4,299,585		16,719		1.54	%		5,916,370		12,514	0.85	%		4,776,080		22,461	1.89	%
Customer repurchase agreements		27,809		82		1.17	%		30,445		54		0.70	%		30,611		86	1.13	%		33,248		75	0.90	%
Other short-term borrowings		100,100		408		1.59	%		216,851		1,317		2.38	%		300,003		501	0.66	%		219,508		1,435	2.59	%
Long-term borrowings		217,555		2,979		5.36	%		217,164		2,979		5.37	%		267,849		3,208	4.74	%		217,458		2,979	5.42	%
Total interest bearing liabilities		5,504,328		28,045		2.02	%		4,764,045		21,069		1.75	%		6,514,833		16,309	1.01	%		5,246,294		26,950	2.06	%


Noninterest bearing liabilities:
Noninterest bearing demand		2,160,450							2,185,559							2,566,348						2,117,901
Other liabilities		61,115							33,105							66,076						64,841
Total noninterest bearing liabilities		2,221,565							2,218,664							2,632,424						2,182,742


Shareholders’ Equity		1,197,513							1,040,826							1,179,452						1,166,487
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	8,923,406						$	8,023,535						$	10,326,709					$	8,595,523


Net interest income			$	80,989						$	81,291						$	81,363					$	81,329
Net interest spread						2.98	%						3.46	%					2.90	%					3.15	%
Net interest margin						3.72	%						4.14	%					3.26	%					3.91	%
Cost of funds						1.28	%						1.07	%					0.65	%					1.30	%

(1)Loans placed on nonaccrual status are included in average balances. Net loan fees and late charges included in interest income on loans totaled $6.3 million and $4.7 million for the three months ended June 30, 2020 and 2019, respectively.

(2)Interest and fees on loans and investments exclude tax equivalent adjustments.

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Eagle Bancorp, Inc.

Consolidated Average Balances, Interest Yields and Rates (Unaudited)

(dollars in thousands)


	Six Months Ended June 30,
	2020						2019
	Average				Average		Average				Average
	Balance		Interest		Yield/Rate		Balance		Interest		Yield/Rate
ASSETS
Interest earning assets:
Interest bearing deposits with other banks and other short-term investments	$	845,540	$	1,720	0.41	%	$	254,804	$	2,771	2.19	%
Loans held for sale (1)		59,488		1,040	3.50	%		26,386		550	4.17	%
Loans (1) (2)		7,833,372		188,643	4.84	%		7,150,300		199,160	5.62	%
Investment securities available-for-sale (2)		844,503		9,998	2.38	%		806,858		10,836	2.71	%
Federal funds sold		33,434		72	0.43	%		19,063		96	1.02	%
Total interest earning assets		9,616,337		201,473	4.21	%		8,257,411		213,413	5.21	%

Total noninterest earning assets		365,080						338,290
Less: allowance for credit losses		94,231						69,713
Total noninterest earning assets		270,849						268,577
TOTAL ASSETS	$	9,887,186					$	8,525,988

LIABILITIES AND SHAREHOLDERS’ EQUITY
Interest bearing liabilities:
Interest bearing transaction	$	803,321	$	2,196	0.55	%	$	648,557	$	2,378	0.74	%
Savings and money market		3,626,437		16,690	0.93	%		2,709,950		24,242	1.80	%
Time deposits		1,243,628		14,174	2.29	%		1,386,876		16,741	2.43	%
Total interest bearing deposits		5,673,386		33,060	1.17	%		4,745,383		43,361	1.84	%
Customer repurchase agreements		30,310		173	1.15	%		30,536		173	1.14	%
Other short-term borrowings		260,030		858	0.65	%		120,832		1,575	2.59	%
Long-term borrowings		251,866		6,275	4.93	%		217,408		5,958	5.45	%
Total interest bearing liabilities		6,215,592		40,366	1.31	%		5,114,159		51,067	2.01	%

Noninterest bearing liabilities:
Noninterest bearing demand		2,416,355						2,195,084
Other liabilities		69,923						68,963
Total noninterest bearing liabilities		2,486,278						2,264,047

Shareholders’ equity		1,185,316						1,147,782
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	9,887,186					$	8,525,988

Net interest income			$	161,107					$	162,346
Net interest spread					2.90	%					3.20	%
Net interest margin					3.36	%					3.97	%
Cost of funds					0.85	%					1.24	%

(1)

Loans placed on nonaccrual status are included in average balances. Net loan fees and late charges included in interest income on loans totaled ~~$4.3~~$10.7 million and ~~$5.0~~$8.8 million for the ~~three~~six months ended ~~September~~June 30, ~~2019~~2020 and ~~2018,~~2019, respectively.

(2)

Interest and fees on loans and investments exclude tax equivalent adjustments.

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~~Eagle Bancorp, Inc.~~

~~Consolidated Average Balances, Interest Yields and Rates (Unaudited)~~

~~(dollars in thousands)~~

Nine Months Ended September 30,
2019 2018
Average Balance Interest Average Yield/Rate Average Balance Interest Average Yield/Rate
ASSETS
Interest earning assets:
Interest bearing deposits with other banks and other short-term investments $ 285,150 $ 4,533 2.13 % $ 321,266 $ 4,152 1.73 %
Loans held for sale (1) 34,265 1,041 4.05 % 24,692 839 4.53 %
Loans (1) (2) 7,265,726 300,966 5.54 % 6,550,754 270,085 5.51 %
Investment securities available-for-sale (2) 784,970 15,740 2.68 % 664,798 12,525 2.52 %
Federal funds sold 21,352 167 1.05 % 15,060 104 0.92 %
Total interest earning assets 8,391,463 322,447 5.14 % 7,576,570 287,705 5.08 %

Total noninterest earning assets 339,355 294,948
Less: allowance for credit losses 70,902 66,429
Total noninterest earning assets 268,453 228,519
TOTAL ASSETS $ 8,659,916 $ 7,805,089

LIABILITIES AND SHAREHOLDERS’ EQUITY
Interest bearing liabilities:
Interest bearing transaction $ 696,825 $ 4,206 0.81 % $ 433,921 $ 2,252 0.69 %
Savings and money market 2,781,663 37,848 1.82 % 2,670,578 23,846 1.19 %
Time deposits 1,406,237 25,883 2.46 % 1,078,608 13,798 1.71 %
Total interest bearing deposits 4,884,725 67,937 1.86 % 4,183,107 39,896 1.28 %
Customer repurchase agreements 29,617 255 1.15 % 45,504 166 0.49 %
Other short-term borrowings 113,845 1,983 2.30 % 228,398 3,425 1.98 %
Long-term borrowings 217,458 8,937 5.42 % 217,068 8,937 5.43 %
Total interest bearing liabilities 5,245,645 79,112 2.02 % 4,674,077 52,424 1.50 %

Noninterest bearing liabilities:
Noninterest bearing demand 2,183,412 2,090,868
Other liabilities 66,318 36,705
Total noninterest bearing liabilities 2,249,730 2,127,573

Shareholders’ equity 1,164,541 1,003,439
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY $ 8,659,916 $ 7,805,089

Net interest income $ 243,335 $ 235,281
Net interest spread 3.12 % 3.58 %
Net interest margin 3.88 % 4.15 %
Cost of funds 1.26 % 0.93 %

~~(1)~~

Loans placed on nonaccrual status are included in average balances. Net loan fees and late charges included in interest income on loans totaled $13.1 million and $14.9 million for the nine months ended September 30, 2019 and 2018, respectively.

~~(2)~~

~~Interest and fees~~ ~~on loans and investments exclude tax equivalent adjustments.~~

Provision for Credit Losses

The provision for credit losses represents the amount of expense charged to current earnings to fund the ~~allowance~~ACL on loans and the ACL on available for ~~credit losses.~~sale investment securities. The amount of the allowance for credit losses on loans is based on many factors which reflect management’s assessment of the risk in the loan portfolio. Those factors include historical losses based on internal and peer data, economic conditions and trends, the value and adequacy of collateral, volume and mix of the portfolio, performance of the portfolio, and internal loan processes of the Company and Bank.

The provision for unfunded commitments is presented separately on the Statement of Operations. This provision considers the probability that unfunded commitments will fund.

Management has developed a comprehensive analytical process to monitor the adequacy of the allowance for credit losses. The process and guidelines were developed utilizing, among other factors, the guidance from federal banking regulatory ~~agencies.~~ agencies, relevant available information, from internal and external sources, relating to past events, current conditions and reasonable and supportable forecasts. Historical credit loss experience provides the basis for the estimation of expected credit losses. Adjustments to historical loss information are made for differences in current loan-specific risk characteristics such as differences in underwriting standards, portfolio mix, loan concentrations, credit quality, or term as well as for changes in environmental conditions, such as changes in unemployment rates, property values or other relevant factors. Refer to additional detail regarding these forecasts in the “Discounted Cash Flow Method" section of Note 1 to the Consolidated Financial Statements.

The results of this process, in combination with conclusions of the Bank’s outside consultants’ review of the risk inherent in the loan portfolio, support management’s assessment as to the adequacy of the allowance at the balance sheet date. Please refer to the discussion under ~~the caption~~ “Critical Accounting Policies” ~~contained~~above and in Note 1 to the ~~Company’s Annual Report on Form 10-K for the year ended December 31, 2018~~Consolidated Financial Statements for an overview of the methodology management employs on a quarterly basis to assess the adequacy of the allowance and the provisions charged to expense. Also, refer to the table on page 4457 which reflects activity in the allowance for credit losses.

During the three months ended ~~September~~June 30, ~~2019,~~2020, the ~~allowance for credit losses~~ACL on loans reflected ~~$3.2~~$19.6 million in provision for credit losses attributable to the ACL for loans and $7.1 million in net charge-offs, which were attributable primarily to one commercial relationship to a personal services company that ceased business operations as a result of COVID-19. The provision for credit losses on loans was $19.6 million for the three months ended June 30, 2020 as compared to $3.6 million for the same period in 2019. Net charge-offs of $7.1 million in the second quarter of 2020 represented an annualized 0.36% of average loans, excluding loans held for sale, as compared to $1.5 million, or an annualized 0.08% of average loans, excluding loans held for sale, in the second quarter of 2019.

During the six months ended June 30, 2020, the ACL on loans reflected $33.9 million in provision for credit losses attributable to the ACL for loans, a day one CECL impact of $10.6 million charged to retained earnings, and $9.4 million in net charge-offs during the period. The provision for credit losses on loans was ~~$3.2~~$33.9 million for the ~~three~~six months ended ~~September~~June 30, ~~2019~~2020 as compared to ~~$2.4~~$7.0 million for the same period in ~~2018.~~2019. Net charge-offs of ~~$1.5~~$9.4 million in the ~~third quarter~~first six months of ~~2019~~2020 represented an annualized ~~0.08%~~0.24% of average loans, excluding loans held for sale, as compared to ~~$862 thousand, or an annualized 0.05% of average loans, excluding loans held for sale, in the third quarter of 2018.~~

During the nine months ended September 30, 2019, the allowance for credit losses reflected $10.1 million in provision for credit losses and $6.4 million in net charge-offs during the period. The provision for credit losses was $10.1 million for the nine months ended September 30, 2019 as compared to $6.1 million for the same period in 2018. Net charge-offs of $6.4 million in the first nine months of 2019 represented an annualized 0.12% of average loans, excluding loans held for sale, as compared to $2.6$4.8 million, or an annualized ~~0.05%~~0.13% of average loans, excluding loans held for sale, in the first ~~nine~~six months of ~~2018.~~

2019.

As part of its comprehensive loan review process, ~~the Loan Committee or Credit Review Committee~~internal loan and credit committees carefully evaluate loans which are past-due 30 days or more. The Committees make a thorough assessment of the conditions and circumstances surrounding each delinquent loan. The Bank’s loan policy requires that loans be placed on nonaccrual if they are ninety days past-due, unless they are well secured and in the process of collection. Additionally, Credit Administration specifically analyzes the status of development and construction projects, sales activities and utilization of interest reserves in order to carefully and prudently assess potential increased levels of risk requiring additional reserves.

The maintenance of a high quality loan portfolio, with an adequate allowance for ~~possible~~ credit losses, will continue to be a primary management objective for the Company.

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The following table sets forth activity in the allowance for credit losses for the periods ~~indicated.~~indicated (unaudited).

	Nine Months Ended September 30,


							Six Months Ended June 30,
(dollars in thousands)	2019			2018			2020			2019
Balance at beginning of period	$	69,944		$	64,758
Balance at beginning of period, prior to adoption of CECL							$	73,658		$	69,944
Impact of adopting CECL								10,614
Charge-offs:
Commercial		1,799			2,435			7,145			5
Income producing - commercial real estate		5,343			121			550			5,343
Owner occupied - commercial real estate		—			132			—			—
Real estate mortgage - residential		—			—			—			—
Construction - commercial and residential		—			1,160			1,768			—
Construction - C&I (owner occupied)		—			—			—			—
Home equity		—			—			—			—
Other consumer		2			15			—			2
Total charge-offs		7,144			3,863			9,463			5,350


Recoveries:
Commercial		377			86			74			167
Income producing - commercial real estate		302			2			—			302
Owner occupied - commercial real estate		2			2			—			2
Real estate mortgage - residential		3			4			—			3
Construction - commercial and residential		52			994			—			37
Construction - C&I (owner occupied)		—			—			—			—
Home equity		—			133			—			—
Other consumer		38			13			4			21
Total recoveries		774			1,234			78			532
Net charge-offs		6,370			2,629			9,385			4,818
Provision for Credit Losses		10,146			6,060
Provision for Credit Losses- Loans								33,909			6,960
Balance at end of period	$	73,720		$	68,189		$	108,796		$	72,086


Annualized ratio of net charge-offs during the period to average loans outstanding during the period		0.12	%		0.05	%		0.24	%		0.13	%

The following table reflects the allocation of the allowance for credit losses at the dates indicated. The allocation of the allowance to each category is not necessarily indicative of future losses or charge-offs and does not restrict the use of the allowance to absorb losses in any category. Balances as of June 30, 2020 are calculated under CECL whereas balances as of December 31, 2019 are calculated under GAAP applicable at that time, the incurred loss model.

September 30, 2019 December 31, 2018
(dollars in thousands) Amount %(1) Amount %(1)
Commercial $ 18,169 19 % $ 15,857 22 %
Income producing - commercial real estate 28,527 51 % 28,034 46 %
Owner occupied - commercial real estate 5,598 13 % 6,242 13 %
Real estate mortgage - residential 1,352 1 % 965 2 %
Construction - commercial and residential 17,882 14 % 17,484 15 %
Construction - C&I (owner occupied) 1,390 1 % 691 1 %
Home equity 575 1 % 599 1 %
Other consumer 227 — 72 —
Total allowance $ 73,720 100 % $ 69,944 100 %

June 30, 2020

December 31, 2019

(dollars in thousands)

Amount

% (1)

Amount

% (1)

Commercial

$
28,078

20
%
$
18,169

20
%
PPP loans

—

6
%

—

—

Income producing - commercial real estate

51,863

46
%

28,527

50
%
Owner occupied - commercial real estate

12,341

12
%

5,598

13
%
Real estate mortgage - residential

1,550

1
%

1,352

1
%
Construction - commercial and residential

11,410

12
%

17,739

14
%
Construction - C&I (owner occupied)

2,398

2
%

1,533

1
%
Home equity

1,112

1
%

575

1
%
Other consumer

44

—

227

—

Total allowance

$
108,796

100
%
$
73,720

100
%

(1)Represents the percent of loans in each category to total loans.

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For the three months ended June 30, 2020, after the initial adjustment to the allowance for credit losses on loans as of January 1, 2020, we further increased the allowance for credit losses on loans by $19.6 million and $33.9 million, respectively.

Nonperforming Assets

As shown in the table below, the Company’s level of nonperforming assets, which is comprised of loans delinquent 90 days or more, and nonaccrual loans, which includes the nonperforming portion of TDRs and OREO, totaled ~~$59.1~~$67.2 million at ~~September~~June 30, ~~2019~~2020 representing ~~0.66%~~0.69% of total assets, as compared to ~~$17.7~~$50.2 million of nonperforming assets, or ~~0.21%~~0.56% of total assets, at December 31, 2018. Nonperforming assets of $59.1 million as of September 30, 2019 included one loan of $16.5 million which was brought current shortly after quarter end. Excluding this loan the ratio of nonperforming assets to total assets would have been 0.47% as of September 30, 2019. ~~The additional increase in nonperforming loans at September 30, 2019, was substantially attributable to softness in the market for ultra high-end residential properties.~~

~~The Company had one accruing loan 90 days or more past due at September 30, 2019. This loan totaled $16.5 million and was brought current shortly after quarter end.~~ The Company had no accruing loans 90 days or more past due at ~~December 31, 2018.~~June 30, 2020. Management remains attentive to early signs of deterioration in borrowers’ financial conditions and to taking the appropriate action to mitigate risk. Furthermore, the Company is diligent in placing loans on nonaccrual status and believes, based on its loan portfolio risk analysis, that its allowance for credit losses, at ~~0.98%~~1.36% of total loans at ~~September~~June 30, ~~2019,~~2020, is adequate to absorb ~~potential~~expected credit losses within the loan portfolio at that date.

The updated standard allows for institutions to evaluate individual loans in the event that the asset does not share similar risk characteristics with its original segmentation. This can occur due to credit deterioration, increased collateral dependency or other factors leading to impairment. In particular, the Company individually evaluates loans on non-accrual and those identified as TDRs, though it may individually evaluate other loans or groups of loans as well if it determines they no longer share similar risk with their assigned segment. Reserves on individually assessed loans are determined by one of two methods: the fair value of collateral or the discounted cash flow. Fair value of collateral is used for loans determined to be collateral dependent, and the fair value represents the net realizable value of the collateral, adjusted for sales costs, commissions, senior liens, etc. Discounted cash flow is used on loans that are not collateral dependent where structural concessions have been made and continuing payments are expected. The continuing payments are discounted over the expected life at the loan’s original contract rate and include adjustments for risk of default.

~~Included~~Under the incurred loss methodology that the Company applied as of December 31, 2019 included in nonperforming assets ~~are~~were loans that the Company ~~considers~~considered to be impaired. Impaired loans ~~are~~were defined as those as to which we ~~believe~~believed it is probable that we ~~will~~would not collect all amounts due according to the contractual terms of the loan agreement, as well as those loans whose terms ~~have~~had been modified in a TDR that ~~have~~had not shown a period of performance as required under applicable accounting standards. Valuation allowances for those loans determined to be impaired ~~are~~were evaluated in accordance with ASC Topic 310—“Receivables,” and updated quarterly. For collateral dependent impaired loans, the carrying amount of the loan iswas determined by current appraised value less estimated costs to sell the underlying collateral, which may behave been adjusted downward under certain circumstances for actual events and/or changes in market conditions. For example, current average actual selling prices less average actual closing costs on an impaired multi-unit real estate project may ~~indicate~~have indicated the need for an adjustment in the appraised valuation of the project, which in turn could increase the associated ASC Topic 310 specific reserve for the loan. Generally, all appraisals associated with impaired loans ~~are~~were updated on a not less than annual basis.

Loans are considered to have been modified in a TDR when, due to a ~~borrower’s~~borrower's financial difficulties, the Company makes unilateral concessions to the borrower that it would not otherwise consider. Concessions could include interest rate reductions, principal or interest forgiveness, forbearance, and other actions intended to minimize economic loss and to avoid foreclosure or repossession of collateral. Alternatively, management, from time-to-time and in the ordinary course of business, implements renewals, modifications, extensions, and/or changes in terms of loans to borrowers who have the ability to repay on reasonable market-based terms, as circumstances may warrant. Such modifications are not considered to be TDRs, as the accommodation of a ~~borrower’s~~borrower's request does not rise to the level of a concession if the modified transaction is at market rates and terms and/or the borrower is not experiencing financial difficulty. For example: (1) adverse weather conditions may create a short term cash flow issue for an otherwise profitable retail business which suggests a temporary interest only period on an amortizing loan; (2) there may be delays in absorption on a real estate project which reasonably suggests extension of the loan maturity at market terms; or (3) there may be maturing loans to borrowers with demonstrated repayment ability who are not in a position at the time of maturity to obtain alternate long-term financing. The determination of whether a restructured loan is a TDR requires consideration of all of the facts and circumstances surrounding the change in terms, and the exercise of prudent business judgment. The Company had ~~ten TDR’s~~thirteen TDRs at ~~September~~June 30, ~~2019~~2020 totaling approximately ~~$10.1~~$20.3 million. ~~Seven~~Ten of these loans totaling approximately ~~$8.6~~$12.3 million are performing under their modified terms. ~~There~~For the first six months of 2020 and 2019, there was one performing TDR loan totaling $5.5 million and one performing TDR loan totaling $2.3 million, respectively, that defaulted on its modified terms which was reclassified to nonperforming loans during the nine months ended September 30, 2019. During the nine months ended September 30, 2018, there were two performing TDRs totaling $937 thousand that defaulted on their modified terms which were reclassified to nonperforming loans.terms. A default is considered to have occurred once the TDR is past due 90 days or more or it has been placed on nonaccrual. ~~For the three months ended September 30, 2019, there was one restructured loan totaling approximately $309 thousand that was paid off from the sale proceeds of the collateral property.~~ Commercial and consumer loans modified in a TDR are closely monitored for delinquency as an early indicator of possible future default. If loans modified in a TDR subsequently default, the Company evaluates the loan for possible further

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impairment. The allowance may be increased, adjustments may be made in the allocation of the allowance, or partial charge-offs may be taken to further write-down the carrying value of the loan. For both the three months ended ~~September~~June 30, 2020 and 2019, there were no loans modified in a ~~TDR,~~TDR. There is uncertainty regarding the region’s overall economic outlook given lack of clarity over how long COVID-19 will continue to impact our region. Management has been working with customers on payment deferrals to assist companies in managing through this crisis. These deferrals amounted to 708 notes and $1.63 billion at June 30, 2020 (approximately 20% of total loans). Through July 31, 2020, we granted approximately 724 temporary modifications representing approximately $1.65 billion in outstanding exposure, including 20 temporary modifications representing $14.5 million that subsequently returned to pre-modification terms. Some of these deferrals may not have met the criteria for treatment under U.S. GAAP as ~~compared~~TDRs. Additionally, none of the deferrals are reflected in the Company’s asset quality measures (i.e. non-performing loans) due to the ~~three months ended September 30, 2018 which had one~~provision of the CARES Act that permits U.S. financial institutions to temporarily suspend the U.S. GAAP requirements to treat such short-term loan ~~totaling $2.4 million modified in a TDR.~~modifications as TDRs. Similar provisions have also been confirmed by interagency guidance issued by the federal banking agencies and confirmed with staff members of the Financial Accounting Standards Board. Other loan portfolio areas of concern and additional COVID-19 loan related matters are discussed below.

Total nonperforming loans amounted to ~~$57.7~~$59.0 million at ~~September~~June 30, ~~2019 (0.76%~~2020 (0.74% of total loans) compared to ~~$16.3~~$48.7 million at December 31, ~~2018 (0.23%~~2019 (0.65% of total loans). ~~Nonperforming loans~~

Included in nonperforming assets at June 30, 2020 was $8.2 million of ~~$57.7~~OREO consisting of five foreclosed properties. This compared to $1.5 million as of ~~September 30, 2019 included one loan~~OREO, consisting of ~~$16.5 million which was brought current shortly after quarter end. Excluding this loan the ratio of nonperforming loans to total loans would have been 0.54% as of September 30,~~three foreclosed properties at December 31, 2019. The ~~additional~~ increase ~~in the ratio of nonperforming loans to total loans at September 30, 2019 as compared to December 31, 2018~~ was due to ~~increased nonperforming loans substantially attributable~~foreclosures involving two ultra high-end residential properties located in Washington, D.C. The Company is continuing to see softness in the market for ultra high-end residential properties. This is particularly true in light of COVID-19 and the related limitations in marketing residential properties.

Included in nonperforming assets at September 30, 2019 was $1.5 million of OREO consisting of three foreclosed properties. Included in nonperforming assets at December 31, 2018 was $1.4 million of OREO, consisting of one foreclosed property. The Company had one foreclosed property with a net carrying value of $1.4 million at ~~September~~June 30, ~~2018.~~2019. OREO properties are carried at fair value less estimated costs to sell. It is the ~~Company’s~~Company's policy to obtain third party appraisals prior to foreclosure, and to obtain updated third party appraisals on OREO properties generally not less frequently than annually. Generally, the Company would obtain updated appraisals or evaluations where it has reason to believe, based upon market indications (such as comparable sales, legitimate offers below carrying value, broker indications and similar factors), that the current appraisal does not accurately reflect current value. There were no sales of OREO property during the first ~~nine~~six months of ~~2019~~2020 and ~~2018.~~2019.

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The following table shows the amounts of nonperforming assets at the dates ~~indicated.~~indicated (unaudited for June 30, 2020).

September 30, December 31,
(dollars in thousands) 2019 2018
Nonaccrual Loans:
Commercial $ 16,074 $ 7,115
Income producing - commercial real estate 5,654 1,766
Owner occupied - commercial real estate 4,124 2,368
Real estate mortgage - residential 5,635 1,510
Construction - commercial and residential 9,148 3,031
Construction - C&I (owner occupied) — —
Home equity 487 487
Other consumer — —
Accrual loans-past due 90 days 16,528 —
Total nonperforming loans (1) 57,650 16,277
Other real estate owned 1,487 1,394
Total nonperforming assets $ 59,137 $ 17,671

Coverage ratio, allowance for credit losses to total nonperforming loans 127.87 % 429.72 %
Ratio of nonperforming loans to total loans 0.76 % 0.23 %
Ratio of nonperforming assets to total assets 0.66 % 0.21 %


	June 30,			December 31,
(dollars in thousands)	2020			2019
Nonaccrual Loans:
Commercial	$	16,721		$	14,928
Income producing - commercial real estate		17,278			9,711
Owner occupied - commercial real estate		10,755			6,463
Real estate mortgage - residential		8,217			5,631
Construction - commercial and residential		5,385			11,509
Construction - C&I (owner occupied)		—			—
Home equity		600			487
Loans held for sale		—			—
Other consumer		6			—
Accrual loans-past due 90 days		—			—
Total nonperforming loans (1)		58,962			48,729
Other real estate owned		8,237			1,487
Total nonperforming assets	$	67,199		$	50,216

Coverage ratio, allowance for credit losses to total nonperforming loans		184.52	%		151.16	%
Ratio of nonperforming loans to total loans		0.74	%		0.65	%
Ratio of nonperforming assets to total assets		0.69	%		0.56	%

(1)

~~(1)~~

Nonaccrual loans reported in the table above include one loan totaling $5.5 million that migrated from a performing TDR during the six months ended June 30, 2020, as compared to the six months ended June 30, 2019 when there was one loan totaling $2.3 million that migrated from a performing ~~TDRs during the nine months ended September 30, 2019, as compared to the nine months ended September 30, 2018 where there were two loans totaling $937 thousand that migrated from performing TDRs.~~ TDR.

Significant variation in the amount of nonperforming loans may occur from period to period because the amount of nonperforming loans depends largely on the condition of a relatively small number of individual credits and borrowers relative to the total loan portfolio.

At ~~September~~June 30, ~~2019,~~2020, there were ~~$48.3~~$16.0 million of performing loans considered potential problem loans, defined as loans that are not included in the 90 ~~day~~days past due, nonaccrual or restructured categories, but for which known information about possible credit problems causes management to be uncertain as to the ability of the borrowers to comply with the present loan repayment terms, which may in the future result in disclosure in the past due, nonaccrual or restructured loan categories. Potential problem loans decreased to ~~$48.3~~$16.0 million at ~~September~~June 30, ~~2019~~2020 from ~~$102.7~~$20.0 million at December 31, ~~2018.~~2019. The Company has taken a conservative posture with respect to risk rating its loan portfolio. Based upon their status as potential problem loans, these loans receive heightened scrutiny and ongoing intensive risk management. Additionally, the Company’s loan loss allowance methodology incorporates increased reserve factors for certain loans considered potential problem loans as compared to the general portfolio. See “Provision for Credit Losses” for a description of the allowance methodology.

Noninterest Income

Total noninterest income includes service charges on deposits, gain on sale of loans, gain on sale of investment securities, income from ~~BOLI~~bank owned life insurance (“BOLI”) and other income.

Total noninterest income for the three months ended ~~September~~June 30, ~~2019~~2020 increased to ~~$6.3~~$12.5 million from ~~$5.6~~$6.4 million for the three months ended ~~September~~June 30, ~~2018,~~2019, a ~~12%~~96% increase. Service charges on deposits for the three months ended June 30, 2020 decreased to $942 thousand from $1.6 million for the three months ended June 30, 2019, a 41% decrease, due to lesser insufficient funds fees. Gain on sale of loans for the three months ended June 30, 2020 increased to $3.1 million from $1.9 million for the three months ended June 30, 2019, a 60% increase, due ~~substantially~~ to ~~$1.1 million~~ higher gains on the sale of residential mortgage loans ($~~2.5 million versus $1.4~~1.2 million) ~~resulting from higher loan origination and sales volume as compared to 2018, partially offset by lower service charges on deposit accounts of $320 thousand.~~. Residential mortgage loans closed were ~~$224~~$308 million for the ~~third~~second quarter of ~~2019 versus $107~~2020 as compared to $152 million for the ~~third~~second quarter of ~~2018.~~2019. Other income for the three months ended June 30, 2020 increased to $6.9 million from $1.8 million for the three months ended June 30, 2019, a 277% increase, due substantially to higher gains associated with the origination, securitization, sale and servicing of FHA loans ($2.5 million), $1.4 million higher small business investment company (“SBIC”) income related to a Community Reinvestment Act (“CRA”) qualified investment fund, $921 thousand higher swap fee income, and $591 thousand higher prepayment fees. Net investment gains on sale were $713 thousand for the three months ended June 30, 2020 compared to $563 thousand for the same period in 2019.

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hedge and mark to market losses incurred during the first quarter of 2020 attributable to the Federal Reserve’s market actions negatively impacting mortgage backed securities pricing combined with sharp declines in servicing right valuations associated with investor uncertainty surrounding COVID-19 at the end of March. Other income for the six months ended June 30, 2020 increased to $8.8 million from $3.7 million for the six months ended June 30, 2019, a 137% increase due substantially to higher gains associated with the origination, securitization, sale and servicing of FHA loans ($2.5 million), $1.4 million higher SBIC income related to a CRA qualified investment fund, $1.1 million higher swap fee income, and $380 thousand higher prepayment fees. Net investment gains were $1.5 million for both the six months ended June 30, 2020 and 2019.

Servicing agreements relating to the Ginnie Mae mortgage-backed securities program require the Company to advance funds to make scheduled payments of principal, interest, taxes and insurance, if such payments have not been received from the borrowers. The Company will generally recover funds advanced pursuant to these arrangements under the FHA insurance and guarantee program. However, in the interim, the Company must absorb the cost of the funds it advances during the time the advance is outstanding. The Company must also bear the costs of attempting to collect on delinquent and defaulted mortgage loans. In addition, if a defaulted loan is not cured, the mortgage loan would be canceled as part of the foreclosure proceedings and the Company would not receive any future servicing income with respect to that loan. At ~~September~~June 30, ~~2019,~~2020, the Company had no funds advanced outstanding under FHA mortgage loan servicing agreements. To the extent the mortgage loans underlying the Company’s servicing portfolio experience delinquencies, the Company would be required to dedicate cash resources to comply with its obligation to advance funds as well as incur additional administrative costs related to increases in collection efforts.

Service charges on deposit accounts decreased by $320 thousand, or 18%, from $1.8 million for the three months ended September 30, 2018 to $1.5 million for the same period in 2019. Service charges on deposit accounts decreased by $394 thousand, or 8%, from $5.2 million for the nine months ended September 30, 2018 to $4.8 million for the same period in 2019. The decrease for the three and nine month period was due primarily to a lower volume of insufficient funds and return item charges.

The Company originates residential mortgage loans and utilizes both “mandatory delivery” and “best efforts” forward loan sale commitments to sell those loans, servicing released. Loans sold are subject to repurchase in circumstances where documentation is deficient, or the underlying loan becomes delinquent, or there is fraud by the borrower. Loans sold are subject to penalty if the loan pays off within a specified period following loan funding and sale. The Bank considers these potential recourse provisions to be a minimal risk, but has established a reserve under ~~generally accepted accounting principles~~GAAP for possible repurchases. There were no repurchases due to fraud by the borrower during the three months ended ~~September~~June 30, ~~2019.~~2020. The reserve amounted to ~~$67~~$150 thousand at ~~September~~June 30, ~~2019~~2020 and is included in other liabilities on the Consolidated Balance Sheets. ~~The Bank does not originate “sub-prime” loans and has no exposure to this market segment.~~

~~The~~Beyond the participation in the PPP program, the Company is an originator of SBA loans and its practice is to sell the guaranteed portion of those loans at a premium. ~~Income~~There was no income from this source ~~was $47 thousand~~ for the three months ended ~~September~~June 30, ~~2019~~2020 compared to ~~$73~~$16 thousand for the same period in ~~2018.~~2019. Income from this source was ~~$171~~$119 thousand for the ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 compared to ~~$373~~$124 thousand for the same period in ~~2018.~~2019. Activity in SBA loan sales to secondary markets can vary widely from quarter to quarter. Refer to page 10 for details regarding the Company’s participation in the PPP program.

Other income totaled $1.7 million for the three months ended September 30, 2019 as compared to $2.0 million for the same period in 2018, a decrease of 17%. ATM fees decreased slightly to $361 thousand for the three months ended September 30, 2019 from $363 thousand for the same period in 2018, a decrease of less than 1%. Noninterest fee income totaled $437 thousand for the three months ended September 30, 2019 a decrease of $120 thousand, or 20%, over the total for the same period in 2018.

Other income totaled $5.4 million for the nine months ended September 30, 2019 as compared to $5.5 million for the same period in 2018, a decrease of 3%. ATM fees decreased to $1.0 million for the nine months ended September 30, 2019 from $1.1 million for the same period in 2018, a decrease of 4%. Noninterest fee income totaled $1.4 million for both the nine months ended September 30, 2019 and 2018, a decrease of $35 thousand, or 2.5%.

Net investment gains were $153 thousand for the three months ended September 30, 2019 compared to no gains for the same period in 2018. Net investment gains were $1.6 million for the nine months ended September 30, 2019 compared to $68 thousand for the same period in 2018 primarily due to $829 thousand of noninterest income recognized during March 2019 on interest rate swap terminations.

Noninterest Expense

Total noninterest expense includes salaries and employee benefits, premises and equipment expenses, marketing and advertising, data processing, legal, accounting and professional, FDIC insurance, and other expenses.

Total noninterest expenses totaled ~~$33.5~~$34.9 million for the three months ended ~~September~~June 30, ~~2019,~~2020, as compared to ~~$31.6~~$33.4 million for the three months ended ~~September~~June 30, ~~2018,~~2019, a ~~6% increase.~~5% increase due substantially to higher legal fees as discussed below. Total noninterest expenses totaled ~~$105.1~~$72.2 million for the ~~nine~~six months ended ~~September~~June 30, ~~2019,~~2020, as compared to ~~$95.0~~$71.7 million for the ~~nine~~six months ended ~~September~~June 30, ~~2018, an 11%~~2019, a 1% increase.

Noninterest expenses in 2020 periods increased slightly from the 2019 amounts primarily because of increased legal expenses. This increase was almost entirely offset by not having the nonrecurring costs related to the former CEO retirement that were present in the 2019 period.

Salaries and employee benefits were ~~$19.1~~$17.1 million for the three months ended ~~September~~June 30, ~~2019,~~2020, as compared to ~~$17.2~~$17.7 million for the same period in ~~2018,~~2019, a decrease of $639 thousand or 4%. The decrease was primarily due to a lower accrual for incentive bonuses and the release of a portion of an ~~increase of 11% due primarily to $2.0 million of non-recurring charges~~accrual related to the ~~acceleration of~~charges for share based compensation ~~expense associated with~~awards for our former CEO and Chairman in the ~~resignation~~second quarter of ~~certain directors.~~2020. The decrease was partially offset by higher salaries and increased headcount in the second quarter of

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2020. Salaries and employee benefits were ~~$60.5~~$34.9 million for the ~~nine~~six months ended ~~September~~June 30, ~~2019,~~2020, as compared to ~~$51.8~~$41.4 million for the same period in ~~2018, an increase~~2019, a decrease of ~~17%~~$6.5 million or 16%. The decrease was primarily due ~~primarily~~ to ~~$8.2~~the $6.2 million of largely nonrecurring charges accrued in the first quarter of 2019 related to ~~acceleration of~~ share based compensation ~~expenses associated with the retirement of our former Chairman and Chief Executive Officer~~awards and the resignation of ~~certain directors.~~

our former CEO and Chairman in March 2019, as well as a lower accrual for incentive bonuses and the release of a portion of an accrual related to the charges for share based compensation awards for our former CEO and Chairman in the first half of 2020. The decrease was partially offset by higher salaries and increased headcount in the first half of 2020.

At ~~September~~June 30, ~~2019,~~2020, the Company’s full time equivalent staff numbered ~~482,~~506 as compared to ~~470~~492 at December 31, ~~2018,~~2019, and ~~478~~496 at ~~September~~June 30, ~~2018.~~

2019.

Premises and equipment expenses amounted to $3.5 million and ~~$3.9~~$3.7 million for the three months ended ~~September~~June 30, ~~2019~~2020 and ~~2018,~~2019, respectively, a ~~10%~~5% decrease. For the three months ended ~~September~~June 30, ~~2019,~~2020, the Company recognized ~~$126~~$120 thousand of sublease revenue as compared to ~~$123~~$126 thousand for the same period in ~~2018. Premises and equipment expenses amounted to $11.0 million and $11.7 million for the nine month periods ended September 30, 2019 and 2018, respectively, a 6% decrease.~~2019. For the ~~nine~~six months ended ~~September~~June 30, ~~2019,~~2020, the Company recognized ~~$377~~$224 thousand of sublease revenue as compared to ~~$379~~$256 thousand for the same period in ~~2018.~~2019. Sublease revenue is accounted for as a reduction to premises and equipment expenses.

Marketing and advertising expenses totaled ~~$1.2~~$1.1 million for ~~both~~ the three months ended ~~September~~June 30, ~~2019~~2020 and ~~2018. Marketing and advertising expenses increased to $3.6 million for the nine months ended September 30, 2019 from $3.4~~$1.3 million for the same period in ~~2018, a 6% increase, primarily due to increased digital, radio~~2019. Marketing and ~~television~~ advertising ~~spend.~~

~~Data processing expense decreased to~~expenses totaled $2.2 million for the ~~three~~six months ended ~~September~~June 30, ~~2019 from~~2020 and $2.4 million for the same period in ~~2018, a 10% decrease primarily due to ongoing contract renegotiations.~~ 2019.

Data processing expense increased to ~~$7.2~~$2.8 million ~~for the nine months ended September 30, 2019 from $7.1 million for the same period in 2018, an increase of less than 1%.~~

~~Legal, accounting and professional fees and expenses~~ for the three months ended ~~September~~June 30, 2019 increased to $3.6 million from $2.1 million for the same period in 2018, a 70% increase. Legal, accounting and professional fees and expenses for the nine months ended September 30, 2019 increased to $8.1 million from $7.3 million for the same period in 2018, an 11% increase. The increased expenses for both the quarter and year to date 2019 periods were primarily associated with government agencies investigations previously disclosed in the second quarter 2019 earnings press release. The Company expects to incur elevated levels of legal and professional fees and expenses for at least the remainder of 2019 as it continues to cooperate with these investigations. Other than these increased costs, we do not believe at this time that the resolution of these investigations will be materially adverse to the Company. As a result of these ongoing investigations, there have been no regulatory restrictions placed on the Company’s ability to fully engage in its banking business as presently conducted. We are, however, unable to predict the duration, scope or outcome of these investigations.

FDIC insurance decreased to $85 thousand for the three months ended September 30, 2019 from $933 thousand for the same period in 2018, a 91% decrease as the increased premium cost of a higher assessment base was effectively offset by the $1.1 million FDIC assessment credit detailed in the “Earnings Summary” section. FDIC insurance decreased to $2.3 million for the nine months ended September 30, 20192020 from $2.6 million for the same period in ~~2018,~~2019, a ~~9% decrease.~~6% increase. Data processing expense increased to $5.3 million for the six months ended June 30, 2020 from $5.0 million for the same period in 2019, a 6% increase.

~~Other expenses decreased to $3.8~~Legal, accounting and professional fees increased $1.2 million for the three months ended ~~September~~June 30, ~~2019 from $3.9~~2020 compared to the three months ended June 30, 2019. Legal fees and expenditures of $2.5 million for the second quarter of 2020 were primarily associated with previously disclosed ongoing governmental investigations and related subpoenas and document requests and our defense of the previously disclosed class action lawsuit. Legal, accounting and professional fees increased $6.5 million for the six months ended June 30, 2020 compared to the six months ended June 30, 2019. Legal fees and expenditures of $7.1 million for the first six months of 2020 were primarily associated with previously disclosed ongoing governmental investigations and related subpoenas and document requests and our defense of the previously disclosed class action lawsuit. The amount of legal fees and expenditures for the three and six month periods ended June 30, 2020 are net of expected insurance coverage where we believe we have a high likelihood of recovery pursuant to our D&O insurance policies, but do not include any offset for potential claims we may have in the future as to which recovery is impossible to predict at this time.

FDIC expenses were $2.0 million for the three months ended June 30, 2020 compared to $1.1 million for the same period in ~~2018,~~2019, a ~~decrease of 3%.~~ 76% increase. FDIC expenses were $3.4 million for the six months ended June 30, 2020 compared to $2.2 million for the same period in 2019, 52% increase. The increases for both the three and six months periods in 2020 compared to the same periods in 2019 were due to a higher assessment base resulting from growth in total assets.

The major components of ~~cost in this category~~other expenses include broker fees, franchise taxes, core deposit intangible amortization and insurance expense. Other expenses increased to ~~$12.5~~$4.5 million for the ~~nine~~three months ended ~~September~~June 30, ~~2019~~2020 from ~~$11.1~~$4.2 million for the same period in ~~2018, an~~2019, a 6% increase, ~~of 12%,~~ due primarily to $940 thousand higher other real estate ~~and utility costs on special assets~~owned (“OREO”) expense offset by lower broker fees ($~~441~~497 thousand) ~~and director compensation~~. Other expenses decreased to $8.2 million for the six months ended June 30, 2020 from $8.7 million for the same period June 30, 2019, a 5% decrease, due primarily to lower broker fees ($~~424 thousand).~~

1.6 million) partially offset by $940 thousand higher OREO expense.

The efficiency ratio, which measures the ratio of noninterest expense to total revenue, was ~~38.34%~~37.18% for the ~~third~~second quarter of ~~2019,~~2020, as compared to ~~36.37%~~38.04% for the ~~third~~second quarter of ~~2018.~~2019. For the first ~~nine~~six months of ~~2019,~~2020, the efficiency ratio was ~~40.08%~~40.34% as compared to ~~37.74%~~40.95% for the same period in ~~2018.~~

2019.

As a percentage of average assets, total noninterest expense (annualized) was ~~1.50%~~1.35% for the three months ended ~~September~~June 30, ~~2019~~2020 as compared to ~~1.58%~~1.55% for the same period in ~~2018.~~2019. As a percentage of average assets, total noninterest expense (annualized) was ~~1.62%~~1.46% for ~~both~~ the ~~nine~~six months ended ~~September~~June 30, ~~2019 and 2018.~~2020 as compared to 1.68% for the same period in 2019.

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Income Tax Expense

The Company’s ratio of income tax expense to pre-tax income (“effective tax rate”) ~~increased~~for the second quarter of 2020 was 24.6% as compared to ~~27.9% and 26.9%~~26.6% for the second quarter of 2019. The decrease in the effective income tax rate largely relates to a significant decline in pre-tax income for the three ~~and nine~~ months ended ~~September~~June 30, 2020 compared to the three months ended June 30, 2019 ~~respectively,~~due to increased credit reserves significantly attributable to COVID-19, and a decrease in disallowed compensation deductions for key executives, mainly related to share based compensation awards and other compensation of our former CEO and Chairman who resigned in March 2019.

The effective income tax rate for the six months ended June 30, 2020 was 25.5% as compared to 26.3% ~~and 25.7%, respectively,~~ for the ~~same periods~~six months ended June 30, 2019. The decrease in ~~2018. The higher~~the effective income tax rate largely relates to a significant decline in pre-tax income for the ~~three and nine~~six months ended ~~September~~June 30, ~~2019, was due primarily~~2020 compared to ~~an increase in nondeductible expenses~~the six months ended June 30, 2019, and a decrease in ~~federal~~disallowed compensation deductions for key executives, mainly related to share based compensation awards and other compensation of our former CEO and Chairman who resigned in March 2019. The decrease in the effective income tax ~~credits.~~rate was recorded in the second quarter of 2020 based on a reduced pre-tax income budget for the year due to increased credit reserves significantly attributable to COVID-19.

FINANCIAL CONDITION

Summary

Total assets at ~~September~~June 30, ~~2019~~2020 were ~~$9.00~~$9.80 billion, a 7%9% increase as compared to ~~$8.39~~$8.99 billion at December 31, ~~2018.~~2019. Total loans (excluding loans held for sale) were ~~$7.56~~$8.02 billion at ~~September~~June 30, ~~2019, an 8%~~2020, a 6% increase as compared to ~~$6.99~~$7.55 billion at December 31, ~~2018.~~2019. Loans held for sale amounted to ~~$52.2~~$68.4 million at ~~September~~June 30, ~~2019, a 171% increase as compared to $19.3~~2020 and $56.7 million at December 31, ~~2018.~~2019, a 21% increase. The investment portfolio totaled ~~$708.5~~$772.4 million at ~~September~~June 30, ~~2019, a 10% decrease as~~2020. As compared to ~~$784.1 million at~~ December 31, ~~2018.~~

2019, the investment portfolio at June 30, 2020 decreased by $71.0 million, or 8%.

Total deposits at ~~September~~June 30, ~~2019~~2020 were ~~$7.40~~$7.94 billion, a 10% increase compared to deposits of ~~$6.97~~$7.22 billion at December 31, 2018, a 6% increase. Total borrowed funds (excluding customer repurchase agreements) were $317.6 million at September 30, 2019 of which $100.0 million were FHLB advances that mature in August 2029. Total borrowed funds were $217.3 million at December 31, 2018 none of which were FHLB advances.2019. We continue to work on expanding the breadth and depth of our existing relationships while we pursue building new relationships. Total borrowed funds (excluding customer repurchase agreements) were $567.9 million at June 30, 2020, as compared to $467.7 million at December 31, 2019.

Total shareholders’ equity ~~at September 30, 2019 increased 7% to $1.18 billion from $1.11~~was $1.19 billion at both June 30, 2020 and December 31, ~~2018 primarily as~~2019. During the ~~result of~~six months ended June 30, 2020, growth in retained ~~earnings.~~ earnings, $11.7 million in unrealized gains on AFS securities, and $2.8 million in additional paid in capital attributable to share based compensation, were effectively offset by $44 million in stock repurchases, dividends declared of $14.2 million, and the day one CECL entry of $10.9 million net of taxes.

The Company’s capital ~~position remains~~ratios remain substantially in excess of regulatory minimum and buffer requirements, ~~for well capitalized status,~~ with a total risk based capital ratio of ~~16.08%~~16.26% at June 30, 2020, as compared to 16.20% at December 31, 2019, both ~~September~~common equity tier 1 (“CET1”) risk based capital and tier 1 risk based capital ratios of 12.80% at June 30, 2020, as compared to 12.87% at December 31, 2019, and a tier 1 leverage ratio of 10.63% at June 30, 2020, as compared to 11.62% at December 31, ~~2018. Tangible book~~2019. The ratio of common equity to total assets was 12.12% at June 30, 2020, as compared to 13.25% at December 31, 2019. Book value per share was ~~$32.02~~$36.86 at ~~September~~June 30, ~~2019,~~2020, a ~~10%~~3% increase over ~~$29.17~~$35.82 at December ~~31, 2018. A $0.22 per share dividend was declared in respect of the common stock on September 25, 2019 to shareholders of record on October 15, 2019 and was paid on October~~ 31, 2019. In addition, the tangible common equity ratio was ~~12.13%~~11.17% at ~~September~~June 30, ~~2019 and 12.11%~~2020, as compared to 12.22% at December 31, ~~2018. Furthermore, Kroll Bond Rating Agency reaffirmed our BBB+ senior unsecured debt rating (A-~~2019. Tangible book value per share was $33.62 at June 30, 2020, a 3% increase over $32.67 at December 31, 2019. Refer to the ~~Bank level) based on our strong~~“Use of Non-GAAP Financial Measures” section for additional detail and a reconciliation of GAAP to non-GAAP financial measures.

While the Company’s capital position ~~above-peer earnings, low operating expense base relative~~remains above regulatory well capitalized levels, due to ~~peer,~~the heightened volatility of the stock market and ~~a history~~uncertainty regarding the impact of ~~strong asset quality metrics.~~

COVID-19, the Board decided to place the Company’s remaining authorization to repurchase shares on hold during the first quarter of 2020. Accordingly, no shares were repurchased during the second quarter of 2020. The Board of Directors and Management continue to monitor this area and may enter the markets from time to time as determined appropriate.

Under the capital rules applicable to the Company and Bank, in order to be considered well-capitalized, the Bank must have a ~~common equity Tier 1~~CET1 risk based capital ~~(“CET1”)~~ ratio of 6.5%, a Tier 1 risk-based ratio of 8.0%, a total risk-based capital ratio of 10.0% and a leverage ratio of 5.0%. The Company and the Bank meet all these requirements and satisfy the requirement to maintain the ~~fully phased in~~ capital conservation buffer

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of 2.5% of ~~common equity tier 1~~CET1 capital for capital adequacy purposes. Failure to maintain the required capital conservation buffer would limit the ability of the Company and the Bank to pay dividends, repurchase shares or pay discretionary bonuses.

Loans, net of amortized deferred fees and costs, at ~~September~~June 30, ~~2019~~2020 (unaudited) and December 31, ~~2018~~2019 by major category are summarized below.


	June 30, 2020					December 31, 2019
(dollars in thousands)	Amount			%		Amount		%
Commercial	$	1,607,056		20	%	$	1,545,906	20	%
PPP loans		456,476		6	%		—	—
Income producing - commercial real estate		3,678,946		46	%		3,702,747	50	%
Owner occupied - commercial real estate		964,077		12	%		985,409	13	%
Real estate mortgage - residential		93,601		1	%		104,221	1	%
Construction - commercial and residential		995,550		12	%		1,035,754	14	%
Construction - C&I (owner occupied)		149,845		2	%		89,490	1	%
Home equity		74,921		1	%		80,061	1	%
Other consumer		1,289		—			2,160	—
Total loans		8,021,761		100	%		7,545,748	100	%
Less: allowance for credit losses		(108,796)					(73,658)
Net loans	$	7,912,965	(1)			$	7,472,090

(1)	Excludes accrued interest receivable of $36.2 million and $21.3 million at June 30, 2020 and December 31, 2019, respectively, which is recorded in other assets.

In its lending activities, the Company seeks to develop and expand relationships with clients whose businesses and individual banking needs will grow with the Bank. Superior customer service, local decision making, and accelerated turnaround time from application to closing have been significant factors in growing the loan portfolio and meeting the lending needs in the markets served, while maintaining sound asset quality.

Loans outstanding reached ~~$7.60~~$8.02 billion at ~~September~~June 30, ~~2019,~~2020, an increase of ~~$567.7~~$476.0 million, or 8%6%, as compared to ~~$6.99~~$7.55 billion at December 31, ~~2018.~~2019. Loan growth during the ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 was predominantly in ~~the income producing – commercial real estate and owner occupied – commercial real estate loan categories.~~PPP loans. Despite ~~an increased~~a continued level of in-market competition for business, the Bank continued to experience organic loan ~~growth across the portfolio.~~production and modest portfolio growth. Notwithstanding increased supply of units, multi-family commercial real estate leasing in the Bank’s market area has held up well, particularly for well-located close-in projects. While as a general comment there has been some softening in the Suburban Maryland office leasing market, in certain well located pockets and submarkets, the sector has evidenced some positive absorption. Overall, commercial real estate values have generally held up well with price escalation in prime pockets, but we continue to be cautious of the cap rates at which some assets are trading and we are being careful with valuations as a result. While the ultra high-end real estate market has softened, the moderately priced housing market has remained stable to increasing, with well-located, Metro accessible properties garnering a premium. However, the potential impact from COVID-19 has not yet been fully reflected in the market. Please refer to the COVID-19 risk factors in Item 1A below.

Loan Portfolio Exposures- COVID-19:

Industry areas of potential concern within the Loan Portfolio are presented below as of June 30, 2020 (unaudited):


	Principal Balance			% of Loan
Industry	(in 000’s)			Portfolio
Accommodation & Food Services	$	840,961	¹		10.5	%
Retail Trade		106,544	²		1.3	%

¹ Includes $82,154 of PPP loans.

² Includes $13,498 of PPP loans.

Concerns over exposures to the Accommodation and Food Service industry and retail are the most immediate at this time. Accommodation and Food Service exposure represents 10.5% of the Bank’s loan portfolio as of June 30, 2020 among 485 customers. Retail trade exposure represents 1.3% of the Bank’s loan portfolio. The Bank has ongoing extensive outreach to these customers and is

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assisting where necessary with PPP loans and payment deferrals or interest only periods in the short term while customers work with the Bank to develop longer term stabilization strategies as the landscape of the COVID-19 pandemic evolves. The uncertain duration and severity of the pandemic will likely impact future credit challenges in these areas.

The table below is collateral driven and shows exposures on loans secured by commercial real estate (“CRE”) by property type as of June 30, 2020 (unaudited). This table excludes loans disclosed in the industry table above.


	Principal Balance		% of Loan
Property Type	(in 000’s)		Portfolio
Restaurant	$	31,364		0.4	%
Hotel		35,815		0.4	%
Retail		405,918		5.1	%

Although not evidenced at June 30, 2020, it is anticipated that some portion of the CRE loans secured by the above property types could be impacted by the tenancies associated with impacted industries. The Bank is working with CRE investor borrowers and monitoring rent collections as part of our portfolio management process.

Deposits and Other Borrowings

The principal sources of funds for the Bank are core deposits, consisting of demand deposits, money market accounts, NOW accounts, savings accounts and certificates of deposit. The deposit base includes transaction accounts, time and savings ~~accounts and~~ accounts, which customers use for cash management and which provide the Bank with a source of fee income and cross-marketing opportunities, as well as an attractive source of lower cost funds. To meet funding needs during periods of high loan demand and seasonal variations in core deposits, the Bank utilizes alternative funding sources such as secured borrowings from the ~~FHLB,~~Federal Home Loan Banks (the “FHLB”), federal funds purchased lines of credit from correspondent banks and brokered deposits from regional and national brokerage firms and Promontory Interfinancial Network, LLC (“Promontory”).

For the ~~nine~~six months ended ~~September~~June 30, ~~2019,~~2020, noninterest bearing deposits ~~decreased $53.1~~increased $351.7 million as compared to December 31, ~~2018,~~2019, while interest bearing deposits increased by ~~$481.3~~$359.9 million during the same period.

From time to time, when appropriate in order to fund strong loan demand, the Bank accepts brokered time deposits, generally in denominations of less than $250 thousand, from national brokerage networks, including Promontory. Additionally, the Bank participates in the Certificates of Deposit Account Registry Service ~~(“CDARS”~~(the “CDARS”) and the Insured Cash Sweep product (“ICS”), which ~~provides~~provide for reciprocal (“two-way”) transactions among banks facilitated by Promontory for the purpose of maximizing FDIC insurance. The Bank also is able to obtain one-way CDARS deposits and participates in Promontory’s Insured Network Deposit (“IND”). At ~~September~~June 30, ~~2019,~~2020, total deposits included ~~$1.70~~$1.79 billion of brokered deposits (excluding the CDARS and ICS two-way), which represented 23% of total deposits. At December 31, ~~2018,~~2019, total brokered deposits (excluding the CDARS and ICS two-way) were ~~$1.36~~$1.80 billion, or ~~20%~~25% of total deposits. The CDARS and ICS two-way component represented ~~$638.9 million, or 9%, of total deposits and $391.7~~$489.7 million, or 6%, of total deposits and $502.9 million, or 7%, of total deposits at ~~September~~June 30, ~~2019~~2020 and December 31, ~~2018,~~2019, respectively. These sources are believed by the Company to represent a reliable and cost efficient alternative funding source for the Bank. However, to the extent that the condition, regulatory position or reputation of the Company or Bank deteriorates, or to the extent that there are significant changes in market interest rates which the Company and Bank do not elect to match, we may experience an outflow of brokered deposits. In that event, we would be required to obtain alternate sources for funding.

At ~~September~~June 30, ~~2019~~2020, the Company had ~~$2.05~~$2.42 billion in noninterest bearing demand deposits, representing ~~28%~~30% of total deposits, compared to ~~$2.10~~$2.06 billion of noninterest bearing demand deposits at December 31, ~~2018,~~2019, or ~~30%~~29% of total deposits. A portion of the growth in noninterest bearing demand deposits in the second quarter was the result of funding PPP loans into operating accounts at the Bank. Average noninterest bearing deposits were ~~31%~~30% of total deposits for the first ~~nine~~six months of ~~2019~~2020 and ~~33%~~32% for the first ~~nine~~six months of ~~2018.~~2019. The Bank also offers business NOW accounts and business savings accounts to accommodate those customers who may have excess short term cash to deploy in interest earning assets.

As an enhancement to the basic noninterest bearing demand deposit account, the Company offers a sweep account, or “customer repurchase agreement,” allowing qualifying businesses to earn interest on short-term excess funds which are not suited for either a certificate of deposit or a money market account. The balances in these accounts were ~~$30.3~~$31.2 million at ~~September~~June 30, ~~2019~~2020 compared to ~~$30.4~~$31.0 million at December 31, ~~2018.~~2019. Customer repurchase agreements are not deposits and are not insured by the FDIC, but are collateralized

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by U.S. agency securities and/or U.S. agency backed mortgage backed securities. These accounts are particularly suitable to businesses with significant fluctuation in the levels of cash flows. Attorney and title company escrow accounts are examples of accounts which can benefit from this product, as are customers who may require collateral for deposits in excess of FDIC insurance limits but do not qualify for other pledging arrangements. This program requires the Company to maintain a sufficient investment securities level to accommodate the fluctuations in balances which may occur in these accounts.

At ~~September~~June 30, ~~2019~~2020 the Company had ~~$1.40~~$1.15 billion in time deposits. Time deposits ~~increased~~decreased by ~~$71.5~~$129.5 million from year end December 31, ~~2018.~~2019. The Bank raises and renews time deposits through its branch network, for its public funds customers, and through brokered CDs to meet the needs of its community of savers and as part of its interest rate risk management and liquidity planning.

The Company had no outstanding balances under its federal funds lines of credit provided by correspondent banks (which are unsecured) at ~~September~~June 30, ~~2019~~2020 and December 31, ~~2018. The Bank~~2019. At June 30, 2020, the Company had ~~$100.0~~$300.0 million ~~in short-term borrowings outstanding under its credit facility from~~of FHLB advances borrowed as part of the ~~FHLB at September 30, 2019. The Bank did not have short-term borrowings outstanding~~overall asset liability strategy and to support loan growth, as compared to $250 million at December 31, ~~2018.~~2019. Outstanding FHLB advances are secured by collateral consisting of a blanket lien on qualifying loans in the Bank’s commercial mortgage, residential mortgage and home equity loan portfolios.

Long-term borrowings outstanding at ~~September~~June 30, ~~2019~~2020 included the Company’s August 5, 2014 issuance of $70.0 million of subordinated notes, due September 1, 2024, and the Company’s July 26, 2016 issuance of $150.0 million of subordinated notes, due August 1, 2026. At June 30, 2020, the Company had $50 million of FHLB long-term advances borrowed as part of the overall asset liability strategy and to support loan growth. For additional information on the subordinated notes, please refer to Note 109 to the Consolidated Financial Statements included in this report.

Liquidity Management

Liquidity is a measure of the Company’s and Bank’s ability to meet loan demand and to satisfy depositor withdrawal requirements in an orderly manner. The Bank’s primary sources of liquidity consist of cash and cash balances due from correspondent banks, excess reserves at the Federal Reserve, loan repayments, federal funds sold and other short-term investments, maturities and sales of investment securities, income from operations and new core deposits into the Bank. The Bank’s investment portfolio of debt securities is held in an available-for-sale status which allows for flexibility, subject to holdings held as collateral for customer repurchase agreements and public funds, to generate cash from sales as needed to meet ongoing loan demand. These sources of liquidity are considered primary and are supplemented by the ability of the Company and Bank to borrow funds or issue brokered deposits, which are termed secondary sources of liquidity and which are substantial. Additionally, the Bank can purchase up to $172.5 million in federal funds on an unsecured basis from its correspondents, against which there was no amount outstanding at ~~September~~June 30, ~~2019,~~2020, and can obtain unsecured funds under one-way CDARS and ICS brokered deposits in the amount of ~~$1.35~~$1.47 billion, against which there was ~~$35.3~~$2.1 million outstanding at ~~September~~June 30, ~~2019.~~2020. The Bank also has a commitment from Promontory to place up to ~~$700.0~~$700 million of brokered deposits from its IND program in amounts requested by the Bank, as compared to an actual balance of ~~$431.8~~$565 million at ~~September~~June 30, ~~2019.~~2020. At ~~September~~June 30, ~~2019~~2020, the Bank was also eligible to make advances from the FHLB up to ~~$1.7~~$1.88 billion based on collateral at the FHLB, of which there was ~~$100~~$300 million outstanding at ~~September~~June 30, ~~2019.~~2020. The Bank may enter into repurchase agreements as well as obtain additional borrowing capabilities from the FHLB, provided adequate collateral exists to secure these lending relationships. The Bank also has a back-up borrowing facility through the Discount Window at the Federal Reserve Bank of Richmond (“Federal Reserve Bank”). This facility, which amounts to approximately ~~$639.0~~$660 million, is collateralized with specific loan assets identified to the Federal Reserve Bank. It is anticipated that, except for periodic testing, this facility would be utilized for contingency funding only.

The loss of deposits through disintermediation is one of the greater risks to liquidity. Disintermediation occurs most commonly when rates rise and depositors withdraw deposits seeking higher rates in alternative savings and investment sources than the Bank may offer. The Bank was founded under a philosophy of relationship banking and, therefore, believes that it has less of an exposure to disintermediation and resultant liquidity concerns than do many banks. The Bank makes competitive deposit interest rate comparisons weekly and feels its interest rate offerings are competitive. There is, however, a risk that some deposits would be lost if rates were to increase and the Bank elected not to remain competitive with its deposit rates. Under those conditions, the Bank believes that it is well positioned to use other sources of funds such as FHLB borrowings, brokered deposits, repurchase agreements and correspondent banks’ lines of credit to offset a decline in deposits in the short run. Over the long-term, an adjustment in assets and change in business emphasis could compensate for a potential loss of deposits. The Bank also maintains a marketable investment portfolio to provide flexibility in the event of significant liquidity needs. The Asset Liability Committee of the Bank ~~(“ALCO”~~(the “ALCO”) and the full Board of Directors of the Bank have adopted policy guidelines which emphasize the importance of core deposits, adequate asset liquidity and a contingency funding plan. Additionally, as noted above, if the condition, regulatory treatment or reputation of the Company or Bank deteriorates, we

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may experience an outflow of brokered deposits as a result of our inability to attract them or to accept or renew them. In that event, we would be required to obtain alternate sources for funding.

Our primary and secondary sources of liquidity remain strong. Average deposits increased 10% for the second quarter of 2020 as compared to the first quarter of 2020. We maintain a very liquid investment portfolio, including significant overnight liquidity. Average short term liquidity was $1.14 billion in second quarter of 2020, which is above EagleBank’s average needs. Secondary sources of liquidity amount to $3.4 billion.

At ~~September~~June 30, ~~2019,~~2020, under the Bank’s liquidity formula, it had ~~$4.57~~$5.24 billion of primary and secondary liquidity sources. The amount is deemed adequate to meet current and projected funding needs.

Commitments and Contractual Obligations

Loan commitments outstanding and lines and letters of credit at ~~September~~June 30, ~~2019~~2020 are as ~~follows:~~follows (unaudited):


(dollars in thousands)
Unfunded loan commitments	$	2,208,726
Unfunded lines of credit		90,704
Letters of credit		59,455
Total	$	2,358,885

(dollars in thousands) 2019
Unfunded loan commitments $ 2,140,889
Unfunded lines of credit 88,495
Letters of credit 68,851
Total $ 2,298,235

Unfunded loan commitments are agreements whereby the Bank has made a commitment and the borrower has accepted the commitment to lend to a customer as long as there is satisfaction of the terms or conditions established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee before the commitment period is extended. In many instances, borrowers are required to meet performance milestones in order to draw on a commitment as is the case in construction loans, or to have a required level of collateral in order to draw on a commitment as is the case in asset based lending credit facilities. Since commitments may expire without being drawn, the total commitment amount does not necessarily represent future cash requirements. As of ~~September~~June 30, ~~2019,~~2020, unfunded loan commitments included ~~$103.4~~$253.9 million related to interest rate lock commitments on residential mortgage loans and were of a short-term nature.

Unfunded lines of credit are agreements to lend to a customer as long as there is no violation of the terms or conditions established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since commitments may expire without being drawn, the total commitment amount does not necessarily represent future cash requirements.

The pipeline of loan commitments remains strong. The Bank did see additional draws on committed lines of credit during the second half of the first quarter which were largely paid back down in the second quarter.

Letters of credit include standby and commercial letters of credit. Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance by the Bank’s customer to a third party. Standby letters of credit generally become payable upon the failure of the customer to perform according to the terms of the underlying contract with the third party. Standby letters of credit are generally not drawn. Commercial letters of credit are issued specifically to facilitate commerce and typically result in the commitment being drawn when the underlying transaction is consummated between the customer and a third party. The contractual amount of these letters of credit represents the maximum potential future payments guaranteed by the Bank. The Bank has recourse against the customer for any amount it is required to pay to a third party under a letter of credit, and holds cash and or other collateral on those standby letters of credit for which collateral is deemed necessary.

Asset/Liability Management and Quantitative and Qualitative Disclosures about Market Risk

A fundamental risk in banking is exposure to market risk, or interest rate risk, since a bank’s net income is largely dependent on net interest income. The Bank’s ALCO formulates and monitors the management of interest rate risk through policies and guidelines established by it and the full Board of Directors and through review of detailed reports discussed quarterly. In its consideration of risk limits, the ALCO considers the impact on earnings and capital, the level and direction of interest rates, liquidity, local economic conditions, outside threats and other factors. Banking is generally a business of managing the maturity and ~~re-pricing~~repricing mismatch inherent in its asset and liability cash flows and to provide net interest income growth consistent with the Company’s profit objectives.

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During the ~~three~~six months ended ~~September~~June 30, ~~2019,~~2020, as compared to the same period in ~~2018,~~2019, the Company was able to ~~maintain its net interest income relatively stable,~~ produce a net interest margin of ~~3.72%~~3.36% as compared to 3.97%, and continue to manage its overall interest rate risk position.

The Company, through its ALCO and ongoing financial management practices, monitors the interest rate environment in which it operates and adjusts the rates and maturities of its assets and liabilities to remain competitive and to achieve its overall financial objectives subject to established risk limits. In the current and expected future interest rate environment, the Company has been maintaining its investment portfolio to manage the balance between yield and ~~prepayment~~ risk in its portfolio of mortgage backed securities should interest rates remain at current levels. Further, the Company has been managing the investment portfolio to provide liquidity and ~~provide~~ some additional yield over cash. Additionally, the Company has limited call risk in its U.S. agency investment portfolio. During the three months ended ~~September~~June 30, ~~2019,~~2020, the average investment portfolio balances increased ~~modestly~~by $12 million, or 1.6%, as compared to average ~~balances~~balance for the three months ended ~~September~~June 30, ~~2018, but decreased from balances at December 31, 2018.~~2019. The cash received from deposit growth along with cash flows from the investment portfolio were deployed into loans, ~~and~~ the purchase of replacement investments and held in cash.

The percentage mix of municipal securities was 9%12% of total investments at ~~September~~June 30, ~~2019~~2020 and 6%9% at ~~September~~June 30, ~~2018.~~2019. The portion of the portfolio invested in mortgage backed securities was ~~73%~~68% at ~~September~~June 30, ~~2019~~2020 and ~~72%~~59% at ~~September~~June 30, ~~2018.~~2019. The portion of the portfolio invested in U.S. agency investments was ~~14%~~7% at ~~September~~June 30, ~~2019~~2020 and ~~21%~~20% at ~~September~~June 30, ~~2018.~~2019. Shorter duration floating rate corporate bonds were 1%4% of total investments at ~~both September~~June 30, ~~2019~~2020 and ~~September~~1% at June 30, ~~2018,~~2019, and SBA bonds, which are included in mortgage backed securities, were ~~10%~~9% and ~~11%~~10% of total investments at ~~September~~June 30, 2020 and June 30, 2019, ~~and September 30, 2018,~~ respectively. ~~More recently over the last three months, as a result of generally lower interest rates, mortgage prepayment speeds increased and the~~The duration of the investment portfolio ~~decreased to 2.9~~remained relatively consistent at 3.1 years at ~~September~~June 30, ~~2019~~2020 from ~~3.9~~3.0 years at ~~September~~June 30, ~~2018.~~

2019.

The re-pricing duration of the loan portfolio was 2018 months at ~~September~~June 30, ~~2019 versus 17~~2020 as compared to 19 months at ~~December 31, 2018,~~June 30, 2020, with fixed rate loans amounting to ~~40% and 36%~~44% of total loans at ~~September~~June 30, ~~2019~~2020 and ~~September~~39% at June 30, ~~2018, respectively.~~2019. Variable and adjustable rate loans comprised ~~60%~~56% (offset by 3% from the dilution impact of PPP loans) and ~~64%~~61% of total loans at ~~September~~both June 30, ~~2019~~2020 and ~~September 30, 2018,~~2019, respectively. Variable rate loans are generally indexed to either the one month LIBOR interest rate, or the Wall Street Journal prime interest rate, while adjustable rate loans are indexed primarily to the five year U.S. Treasury interest rate.

The duration of the deposit portfolio increased to 2939 months at ~~September~~June 30, ~~2019~~2020 from 2633 months at ~~December~~March 31, ~~2018.~~2020. The ~~change~~increase since ~~December 31, 2018~~March was due substantially to a change in the deposit mix and the duration of ~~time deposits~~money market accounts as ~~market interest~~deposit competition waned with rates ~~decreased and customers anticipated continuing rate declines. Additionally, the Bank maintained a higher percentage of fixed rate time deposits~~ at ~~September 30, 2019 than was the case at December 31, 2018.~~

all-time lows.

The Company has continued its emphasis on funding loans in its marketplace, although competition for new loans ~~persists.~~has diminished. A disciplined approach to loan pricing, with variable and adjustable rate loans comprising ~~60%~~56% of total loans ~~(at September~~(offset by 3% from the dilution impact of PPP loans) at June 30, ~~2019),~~2020, has resulted in a loan portfolio yield of ~~5.39%~~4.84% for the ~~three~~six months ended ~~September~~June 30, ~~2019~~2020 as compared to ~~5.69%~~5.62% for the same period in ~~2018.~~2019. Variable and adjustable rate loans provide additional income opportunities should interest rates rise from current levels.

The net unrealized gain before income tax on the investment portfolio was ~~$9.1~~$21.8 million at ~~September~~June 30, ~~2019~~2020 as compared to a net unrealized ~~loss~~gain before tax of ~~$9.5~~$20.1 million at ~~December~~March 31, ~~2018.~~2019. The increase in the net unrealized gain on the investment portfolio ~~at September 30, 2019 as compared to December 31, 2018~~ was due primarily to lower interest rates at ~~September~~June 30, ~~2019.~~2020. At ~~September~~June 30, ~~2019,~~2020, the net unrealized gain position represented ~~1.3%~~3.0% of the investment portfolio’s book value.

There can be no assurance that the Company will be able to successfully achieve its optimal asset liability mix, as a result of competitive pressures, customer preferences and the inability to perfectly forecast future interest rates and movements.

One of the tools used by the Company to manage its interest rate risk is a static ~~GAP~~gap analysis presented below. The Company also employs an earnings simulation model on a quarterly basis to monitor its interest rate sensitivity and risk and to model its balance sheet cash flows and the related income statement effects in different interest rate scenarios. The model utilizes current balance sheet data and attributes and is adjusted for assumptions as to investment maturities (including prepayments), loan prepayments, interest rates, and the level of noninterest income and noninterest expense. The data is then subjected to a “shock test” which assumes a simultaneous change in interest rates up 100, 200, 300, and 400 basis points or down 100 and 200, along the entire yield curve, but not below zero. The results are analyzed as to the impact on net interest income, net income and the market equity over the next twelve and twenty-four month periods from ~~September~~June 30, ~~2019.~~2020. In addition to analysis of simultaneous changes in interest rates along the yield curve, changes based on interest rate “ramps” is also performed. This analysis represents the impact of a more gradual change in interest rates, as well as yield curve shape changes.

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For the analysis presented below, at ~~September~~June 30 ~~2019,~~, 2020, the simulation assumes a 50 basis point change in interest rates on money market and interest bearing transaction deposits for each 100 basis point change in market interest rates in a decreasing interest rate shock scenario with a floor of 0 basis points (compared to a floor of 10 basis points in the same analysis as of March 31, 2020), and assumes a 70 basis point change in interest rates on money market and interest bearing transaction deposits for each 100 basis point change in market interest rates in an increasing interest rate shock scenario. The floor rate in the analysis was lowered due to the fact that in the current interest rate environment, there are interest bearing accounts with current rates less than 10 basis points.

As quantified in the table below, the Company’s analysis at ~~September~~June 30, ~~2019~~2020 shows a moderate effect on net interest income (over the next 12 months) as well as a moderate effect on the economic value of equity when interest rates are shocked both down 100 and 200 basis points and up 100, 200, 300, and 400 basis points. This moderate impact is due substantially to the significant level of variable rate and ~~re-priceable~~repriceable assets and liabilities and related shorter relative durations. The ~~re-pricing~~repricing duration of the investment portfolio at ~~September~~June 30, ~~2019~~2020 is ~~2.9~~3.1 years, the loan portfolio ~~1.7~~1.5 years, the interest bearing deposit portfolio ~~2.4~~3.3 years, and the borrowed funds portfolio ~~4.4~~6.3 years.

The following table reflects the result of simulation analysis on the ~~September~~June 30, ~~2019~~2020 asset and liabilities balances:

Change in interest rates (basis points)

Percentage change in
net interest income

Percentage change in
net income

Percentage change in market
value of portfolio equity

Percentage change in

Change in interest

Percentage change in net

Percentage change in

market value of portfolio

rates (basis points)

interest income

net income

equity

+400

+19.2%

+32.7%

+6.9%

+17.4%

+31.6%

+17.3%

+300

+14.4%

+24.6%

+6.0%

+12.0%

+21.8%

+13.8%

+200

+9.7%

+16.4%

+4.9%

+6.7%

+12.1%

+10.0%

+100

+4.8%

+8.2%

+2.9%

+23%

+4.2%

+5.7%

—

-100

-3.7%

-6.3%

-4.3%

-0.3%

-0.5%

-15.8%

-200

-8.0%

-13.6%

-14.0%

-0.8%

-1.4%

-28.1%

The results of the simulation are within the relevant policy limits adopted by the ~~Company.~~Company for percentage change in net interest income. For net interest income, the Company has adopted a policy limit of -10% for a 100 basis point change, -12% for a 200 basis point change, -18% for a 300 basis point change and -24% for a 400 basis point change. For the market value of equity, the Company has adopted a policy limit of -12% for a 100 basis point change, -15% for a 200 basis point change, -25% for a 300 basis point change and -30% for a 400 basis point change. ~~Due~~The amounts in the second quarter exceeded these limits due to the already low level of rates on non-maturing deposit instruments. Management has determined that due to the level of market rates at ~~September~~June 30, ~~2019,~~2020, interest rate shocks of -100, -200, -300 and -400 basis points leave the Bank with near zero ~~and~~down to negative rate instruments and are not considered practical or informative. The changes in net interest income, net income and the economic value of equity in ~~both a~~ higher ~~and lower~~ interest rate shock ~~scenario~~scenarios at ~~September~~June 30, ~~2019~~2020 are not considered to be excessive. The impact of ~~-3.7%~~-0.3% in net interest income and ~~-6.3%~~-0.5% in net income given a 100 basis point decrease in market interest rates reflects in large measure the impact of variable rate loans and fed funds sold repricing downward while ~~non-interest bearing~~ deposits remain at expected floor rates and are not expected to have lower interest ~~costs.~~

rates.

In the ~~third~~second quarter of ~~2019,~~2020, the Company continued to manage its interest rate sensitivity position to moderate levels of risk, as indicated in the simulation results above. The interest rate risk position at ~~September~~June 30, ~~2019~~2020, was relatively similar to the March 31, 2020 position for the up rate scenarios, but the down rate scenarios are now limited by the already low interest rate ~~risk position at December 31, 2018.~~

environment.

Certain shortcomings are inherent in the method of analysis presented in the foregoing table. For example, although certain assets and liabilities may have similar maturities or repricing periods, they may react in different degrees to changes in market interest rates. Also, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind changes in market rates. Additionally, certain assets, such as adjustable-rate mortgage loans, have features that limit changes in interest rates on a short-term basis and over the life of the loan. Further, in the event of a change in interest rates, prepayment and early withdrawal levels could deviate significantly from those assumed in calculating the tables. Finally, the ability of many borrowers to service their debt may decrease in the event of a significant interest rate increase.

During the ~~third~~second quarter of ~~2019,~~2020, average market interest rates decreased across the yield curve. Overall, there was a ~~flattening~~slight steepening of the yield curve as compared to the ~~third~~second quarter of ~~2018~~2019 with rate decreases being generally more significant at the ~~longer~~shorter end of the yield curve.

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As compared to the ~~third~~second quarter of ~~2018,~~2019, the average two-year U.S. Treasury rate decreased by 89194 basis points from ~~2.58%~~2.13% to ~~1.69%~~0.19%, the average five year U.S. Treasury rate decreased by ~~118~~176 basis points from ~~2.81%~~2.12% to ~~1.63%~~0.36% and the average ten year U.S. Treasury rate decreased by ~~112~~165 basis points from ~~2.92%~~2.34% to ~~1.80%~~0.69%. The Company’s net interest margin was ~~3.72%~~3.26% for the ~~third~~second quarter of ~~2019~~2020 and ~~4.15%~~3.91% in the ~~third~~second quarter of ~~2018.~~2019. The Company believes that the net interest margin in the most recent quarter as compared to ~~2018’s third~~2019’s second quarter has been consistent with its interest rate risk ~~analysis at December 31, 2018.~~analysis.

~~GAP~~Gap Position

Banks and other financial institutions earnings are significantly dependent upon net interest income, which is the difference between interest earned on earning assets and interest expense on interest bearing liabilities. This revenue represented ~~93%~~87% and ~~94%~~93% of the Company’s revenue for the ~~third~~second quarter of 2020 and 2019, ~~and 2018,~~ respectively.

In falling interest rate environments, net interest income is maximized with longer term, higher yielding assets being funded by lower yielding short-term funds, or what is referred to as a negative mismatch or ~~GAP.~~gap. Conversely, in a rising interest rate environment, net interest income is maximized with shorter term, higher yielding assets being funded by longer-term liabilities or what is referred to as a positive mismatch or ~~GAP.~~

gap.

The ~~GAP~~gap position, which is a measure of the difference in maturity and repricing volume between assets and liabilities, is a means of monitoring the sensitivity of a financial institution to changes in interest rates. The chart below provides an indication of the sensitivity of the Company to changes in interest rates. A negative ~~GAP~~gap indicates the degree to which the volume of repriceable liabilities exceeds repriceable assets in given time periods.

At ~~September~~June 30, ~~2019,~~2020, the Company had a positive ~~GAP~~gap position of approximately ~~$420~~$476 million, or 5% of total assets, out to three months, and a positive cumulative ~~GAP~~gap position of ~~$384~~$624 million, or 4%6% of total assets out to 12twelve months; as compared to a ~~positive GAP~~negative gap position of approximately ~~$604~~$370 million or 7%4% of total assets out to three months, and a ~~positive~~negative cumulative ~~GAP~~gap position of ~~$417~~$269 million or 5%3% of total assets out to 12twelve months at ~~December~~March 31, ~~2018.~~2019. The change in the ~~positive GAP~~gap position at ~~September~~June 30, ~~2019,~~2020, as compared to ~~December~~March 31, ~~2018,~~2020, was due to ~~an increase~~expected rate sensitivity of non-interest bearing accounts and the time frame in ~~immediately repricing~~which they might migrate interest bearing ~~liabilities while increasing fixed rate assets.~~accounts. The change in the ~~GAP~~gap position at ~~September~~June 30, ~~2019~~2020 as compared to ~~December~~March 31, ~~2018~~2020 is not deemed material to the Company’s overall interest rate risk position, which relies more heavily on simulation analysis which captures the full optionality within the balance sheet. The current position is within guideline limits established by the ALCO. While management believes that this overall position creates a reasonable balance in managing its interest rate risk and maximizing its net interest margin within plan objectives, there can be no assurance as to actual results.

Management has carefully considered its strategy to maximize interest income by reviewing interest rate levels, economic indicators and call features within its investment portfolio, as well as interest rate floors within its loan portfolio. These factors have been discussed with the ALCO and management believes that current strategies ~~are~~remain appropriate to current economic and interest rate trends.

If interest rates increase by 100 basis points, the Company’s net interest income and net interest margin are expected to increase modestly due to the impact of significant volumes of variable rate assets ~~together with~~more than offsetting the assumption of an increase in money market interest rates by 70% of the change in market interest rates.

If interest rates decline by 100 basis points, the Company’s net interest income and margin are expected to decline modestly as the impact of lower market rates on a large amount of liquid assets more than offsets the ability to lower interest rates on interest bearing liabilities.

Because competitive market behavior does not necessarily track the trend of interest rates but at times moves ahead of financial market influences, the change in the cost of liabilities may be different than anticipated by the ~~GAP~~gap model. If this were to occur, the effects of a declining interest rate environment may not be in accordance with management’s expectations.

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GAP Analysis

~~September~~June 30, ~~2019~~2020

(dollars in thousands)

Repricible in: 0-3 months 4-12 months 13-36 months 37-60 months Over 60 months Total Rate
Sensitive Non Sensitive Total
RATE SENSITIVE ASSETS:
Investment securities $ 161,837 $ 81,444 $ 161,635 $ 123,778 $ 208,576 $ 737,270
Loans (1)(2) 3,878,017 648,834 1,271,654 971,558 841,297 7,611,360
Fed funds and other short-term investments 388,865 — — — — 388,865
Other earning assets 74,726 — — — — 74,726
Total $ 4,503,445 $ 730,278 $ 1,433,289 $ 1,095,336 $ 1,049,873 $ 8,812,221 $ 191,246 $ 9,003,467

RATE SENSITIVE LIABILITIES:
Noninterest bearing demand $ 77,850 $ 215,716 $ 463,364 $ 336,501 $ 957,675 $ 2,051,106
Interest bearing transaction 918,011 — — — — 918,011
Savings and money market 2,809,530 — — — 225,000 3,034,530
Time deposits 348,057 550,545 369,117 128,008 3,139 1,398,866
Customer repurchase agreements and fed funds purchased 30,297 — — — — 30,297
Other borrowings — — 148,197 69,392 100,000 317,589
Total $ 4,183,745 $ 766,261 $ 980,678 $ 533,901 $ 1,285,814 $ 7,750,399 $ 68,474 $ 7,818,873
GAP $ 319,700 $ (35,983 ) $ 452,611 $ 561,435 $ (235,941 ) $ 1,061,822
Cumulative GAP $ 319,700 $ 283,717 $ 736,328 $ 1,297,763 $ 1,061,822

Cumulative gap as percent of total assets 3.55 % 3.15 % 8.18 % 14.41 % 11.79 %

OFF BALANCE-SHEET:
Interest Rate Swaps - LIBOR based $ 100,000 $ — $ (100,000 ) $ — $ — $ —
Interest Rate Swaps - Fed Funds based — — — — — —
Total $ 100,000 $ — $ (100,000 ) $ — $ — $ — $ — $ —
GAP $ 419,700 $ (35,983 ) $ 352,611 $ 561,435 $ (235,941 ) $ 1,061,822
Cumulative GAP $ 419,700 $ 383,717 $ 736,328 $ 1,297,763 $ 1,061,822 $ —
Cumulative gap as percent of total assets 4.66 % 4.26 % 8.18 % 14.41 % 11.79 %


																Total
	0-3			4-12			13-36			37-60			Over 60			Rate		Non
Repricible in:	months			months			months			months			months			Sensitive		Sensitive		Total
RATE SENSITIVE ASSETS:
Investment securities	$	155,966		$	114,656		$	146,829		$	119,774		$	235,169		$	772,394
Loans (1)(2)		4,025,799			881,156			1,586,143			793,459			803,637			8,090,194
Fed funds and other short-term investments		623,843			—			—			—			—			623,843
Other earning assets		75,912			—			—			—			—			75,912
Total	$	4,881,520		$	995,812		$	1,732,972		$	913,233		$	1,038,806		$	9,562,343		237,327	$	9,799,670

RATE SENSITIVE LIABILITIES:
Noninterest bearing demand	$	88,262		$	245,520		$	532,958		$	393,206		$	1,156,112		$	2,416,058
Interest bearing transaction		861,703			—			—			—			—			861,703
Savings and money market		3,279,718			—			—			—			225,000			3,504,718
Time deposits		244,371			502,658			341,655			61,676			3,133			1,153,493
Customer repurchase agreements and fed funds purchased		31,198			—			—			—			—			31,198
Other borrowings		—			—			148,307			69,574			350,000			567,881
Total	$	4,505,252		$	748,178		$	1,022,920		$	524,456		$	1,734,245		$	8,535,051		76,724	$	8,611,775
GAP	$	376,269		$	247,634		$	710,052		$	388,776		$	(695,438)		$	1,027,292
Cumulative GAP	$	376,269		$	623,902		$	1,333,954		$	1,722,731		$	1,027,292

Cumulative gap as percent of total assets		3.84	%		6.37	%		13.61	%		17.58	%		10.48	%

OFF BALANCE-SHEET:
Interest Rate Swaps - LIBOR based	$	—		$	—		$	—		$	—		$	—		$	—
Interest Rate Swaps - Fed Funds based		100,000			(100,000)			—			—			—			—
Total	$	100,000		$	(100,000)		$	—		$	—		$	—		$	—		—	$	—
GAP	$	476,269		$	147,634		$	710,052		$	388,776		$	(695,438)		$	1,027,292
Cumulative GAP	$	476,269		$	623,902		$	1,333,954		$	1,722,731		$	1,027,292		$	—
Cumulative gap as percent of total assets		4.86	%		6.37	%		13.61	%		17.58	%		10.48	%

(1)

Includes loans held for ~~sale.~~sale

(2)

Nonaccrual loans are included in the over 60 months ~~category.~~category

Capital Resources and Adequacy

The assessment of capital adequacy depends on a number of factors such as asset quality and mix, liquidity, earnings performance, changing competitive conditions and economic forces, stress testing, regulatory measures and policy, as well as the overall level of growth and complexity of the balance sheet. The adequacy of the Company’s current and future capital needs is monitored by management on an ongoing basis. Management seeks to maintain a capital structure that will assure an adequate level of capital to support anticipated asset growth and to absorb potential losses.

The federal banking regulators have issued guidance for those institutions which are deemed to have concentrations in commercial real estate lending. Pursuant to the supervisory criteria contained in the guidance for identifying institutions with a potential commercial real estate concentration risk, institutions which have (1) total reported loans for construction, land development, and other land acquisitions which represent 100% or more of an institution’s total risk-based capital; or (2) total commercial real estate loans representing 300% or more of the institution’s total risk-based capital and the institution’s commercial real estate loan portfolio has increased 50% or more during the prior 36 months are identified as having potential commercial real estate concentration risk. Institutions which are deemed to have concentrations in commercial real estate lending are expected to employ heightened levels of risk management with respect to their commercial real estate portfolios, and may be required to hold higher levels of capital. The Company, like many community banks, has a concentration in commercial real estate loans, and the Company has experienced growth in its commercial real estate portfolio in recent years. At ~~September~~June 30, ~~2019,~~2020, non-owner-occupied commercial real estate loans (including construction, land, and land development loans) represent ~~355%~~342% of total risk based capital. Construction, land and land development loans represent ~~123%~~106% of total risk based capital. Management has extensive experience in commercial real estate lending, and has implemented and continues to maintain heightened risk management procedures, and strong underwriting criteria with respect to its commercial real estate portfolio. Loan monitoring practices include but are not limited to periodic stress testing analysis to evaluate changes to cash flows, owing to interest rate increases and declines in net operating income. Nevertheless, we may be required to maintain higher levels of capital as a result of our commercial real estate concentrations, which could require us to obtain additional capital, and may adversely affect shareholder returns. The Company has an extensive Capital Plan and Policy, which includes pro-forma

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projections including stress testing within which the Board of Directors has established internal minimum targets for regulatory capital ratios that are in excess of well capitalized ratios.

The Company and the Bank are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and prompt corrective action regulations involve quantitative measures of assets, liabilities, and certain off-balance-sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators about components, risk weightings, and other factors and the regulators can lower classifications in certain cases. Failure to meet various capital requirements can initiate regulatory action that could have a direct material effect on the financial statements.

The prompt corrective action regulations provide five categories, including well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent overall financial condition. If a bank is only adequately capitalized, regulatory approval is required to, among other things, accept, renew or roll-over brokered deposits. If a bank is undercapitalized, capital distributions and growth and expansion are limited, and plans for capital restoration are required.

The Board of Governors of the Federal Reserve Board and the FDIC have adopted rules (the “Basel III Rules”) implementing the Basel Committee on Banking ~~Supervision’s~~Supervision's capital guidelines for U.S. banks (commonly known as Basel III). Under the Basel III ~~rules,~~Rules, the Company and Bank are required to maintain, inclusive of the capital conservation buffer of 2.5%, a minimum CET1 ratio of 7.0%;, a minimum ratio of Tier 1 capital to risk-weighted assets of 8.5%, a minimum total capital to risk-weighted assets ratio of 10.5%, and ~~requires~~ a minimum leverage ratio of 4.0%. ~~The~~At June 30, 2020, the Company and the Bank meet all these requirements, and satisfy the requirement to maintain ~~the fully phased in~~a capital conservation buffer of 2.5% of ~~common equity tier 1~~CET1 capital for capital adequacy purposes.

During the ~~third~~fourth quarter of 2019, the Company ~~adopted its first share repurchase program.~~extended the Repurchase Program. Under the ~~repurchase program,~~Board approval in December, the Company may repurchase up to ~~1,715,547~~an aggregate of 1,641,000 shares of its common stock ~~or approximately 5%~~(inclusive of ~~its outstanding~~ shares ~~of common stock at June 30, 2019 of approximately 34,539,853. The repurchase program will expire on~~remaining under the initial authorization), through December 31, ~~2019,~~2020, subject to earlier termination ~~of the program~~ by the Board of ~~Directors. Through September 30, 2019,~~Directors (the “Repurchase Program Extension”).

While the ~~Company has~~Company’s capital position remains well above regulatory well capitalized levels, due to the heightened volatility of the stock market and uncertainty regarding the impact of COVID-19, the Company’s remaining authorization to repurchase shares was put on hold during the first quarter of 2020 and there were no shares repurchased ~~822,200 shares at a weighted average price~~during the second quarter of ~~$40.58 per share.~~2020. The Board of Directors and Management continue to monitor this area and may enter the markets from time to time as determined appropriate.

The Company announced a regular quarterly cash dividend on ~~September 25, 2019~~June 24, 2020 of $0.22 per share to shareholders of record on ~~October~~July 15, ~~2019~~2020 and payable ~~October~~July 31, ~~2019.~~2020.

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The actual capital amounts and ratios for the Company and Bank as of ~~September~~June 30, ~~2019~~2020 (unaudited) and December 31, ~~2018~~2019 are presented in the table below.



											To Be Well
									Minimum		Capitalized
									Required For		Under Prompt
	Company				Bank				Capital		Corrective
	Actual				Actual				Adequacy		Action
(dollars in thousands)	Amount		Ratio		Amount		Ratio		Purposes		Regulations*
As of June 30, 2020
CET1 capital (to risk weighted assets)	$	1,085,861	12.80	%	$	1,244,976	14.69	%	7.00	%	6.50	%
Total capital (to risk weighted assets)		1,379,471	16.26	%		1,332,586	15.72	%	10.50	%	10.00	%
Tier 1 capital (to risk weighted assets)		1,085,861	12.80	%		1,244,976	14.69	%	8.50	%	8.00	%
Tier 1 capital (to average assets)		1,085,861	10.63	%		1,244,976	12.20	%	4.00	%	5.00	%

As of December 31, 2019
CET1 capital (to risk weighted assets)	$	1,082,516	12.87	%	$	1,225,486	14.64	%	7.00	%	6.50	%
Total capital (to risk weighted assets)		1,362,253	16.20	%		1,299,223	15.52	%	10.50	%	10.00	%
Tier 1 capital (to risk weighted assets)		1,082,516	12.87	%		1,225,486	14.64	%	8.50	%	8.00	%
Tier 1 capital (to average assets)		1,082,516	11.62	%		1,225,486	13.18	%	4.00	%	5.00	%

Company Bank To Be Well
Capitalized Under
Prompt
Actual Actual Minimum Required For Corrective Action
(dollars in thousands) Amount Ratio Amount Ratio Capital Adequacy Purposes Regulations *
As of September 30, 2019
CET1 capital (to risk weighted assets) $ 1,074,526 12.76 % $ 1,220,452 14.51 % 7.000 % 6.5 %
Total capital (to risk weighted assets) 1,354,313 16.08 % 1,294,239 15.38 % 10.500 % 10.0 %
Tier 1 capital (to risk weighted assets) 1,074,526 12.76 % 1,220,452 14.51 % 8.500 % 8.0 %
Tier 1 capital (to average assets) 1,074,526 12.19 % 1,220,452 13.87 % 4.000 % 5.0 %

As of December 31, 2018
CET1 capital (to risk weighted assets) $ 1,007,438 12.49 % $ 1,147,151 14.23 % 6.375 % 6.5 %
Total capital (to risk weighted assets) 1,297,427 16.08 % 1,217,140 15.10 % 9.875 % 10.0 %
Tier 1 capital (to risk weighted assets) 1,007,438 12.49 % 1,147,151 14.23 % 7.875 % 8.0 %
Tier 1 capital (to average assets) 1,007,438 12.10 % 1,147,151 13.78 % 5.000 % 5.0 %

* Applies to Bank only

The regulatory capital ratios presented above vary slightly from what was presented in our second quarter earnings release, reflecting adjustments to fully capture the delay in reflecting the impact of the adoption of the CECL methodology provided by the federal banking regulators in March 2020, as described below.

Bank and holding company regulations, as well as Maryland law, impose certain restrictions on dividend payments by the Bank, as well as restricting extensions of credit and transfers of assets between the Bank and the Company. At ~~September~~June 30, ~~2019~~2020 the Bank could pay dividends to the parent to the extent of its earnings so long as it maintained the minimum required capital ~~ratios.~~ratios listed in the table above.

In December 2018, federal banking regulators issued a final rule that provides an optional three-year phase-in period for the adverse regulatory capital effects of adopting the CECL methodology pursuant to new accounting guidance for the recognition of credit losses on certain financial instruments, effective January 1, 2020. In March 2020, the federal banking regulators issued an interim final rule that provides banking organizations with an alternative option to temporarily delay for two years the estimated impact of the adoption of the CECL methodology on regulatory capital, followed by the three-year phase-in period. The cumulative amount that is not recognized in regulatory capital will be phased in at 25 percent per year beginning January 1, 2022. We have elected to adopt the March 2020 interim final rule.

Use of Non-GAAP Financial Measures

The Company considers the following non-GAAP measurements useful for investors, regulators, management and others to evaluate capital adequacy and to compare against other financial institutions. The tables below provide a reconciliation of these non-GAAP financial measures with financial measures defined by GAAP.

Tangible common equity to tangible assets (the ~~“tangible~~"tangible common equity ~~ratio”~~ratio") ~~and~~, tangible book value per common share, the annualized return on average tangible common equity, and efficiency ratio are non-GAAP financial measures derived from GAAP-based amounts. The Company calculates the tangible common equity ratio by excluding the balance of intangible assets from common ~~shareholders’~~shareholders' equity and dividing by tangible assets. The Company calculates tangible book value per common share by dividing tangible common equity by common shares outstanding, as compared to book value per common share, which the Company calculates by dividing common ~~shareholders’~~shareholders' equity by common shares outstanding. The Company calculates ~~return on~~the ROATCE by dividing net income available to common shareholders by average tangible common equity which is calculated by excluding the average balance of intangible assets from the average common shareholders’ equity. The Company calculates the efficiency ratio by dividing ~~annualized year to date~~noninterest expense by the sum of net interest income ~~by tangible common equity.~~ and noninterest income. The efficiency ratio measures a bank’s overhead as a percentage of its revenue.

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The Company considers this information important to shareholders as tangible equity is a measure that is consistent with the calculation of capital for bank regulatory purposes, which excludes intangible assets from the calculation of risk based ~~ratios.~~ratios and as such is useful for investors, regulators, management and others to evaluate capital adequacy and to compare against other financial institutions.

GAAP Reconciliation (Unaudited)

(dollars in thousands except per share data)


	Three Months Ended			Six Months Ended			Year Ended			Three Months Ended			Six Months Ended
	June 30, 2020			June 30, 2020			December 31, 2019			June 30, 2019			June 30, 2019
Common shareholders’ equity				$	1,187,895		$	1,190,681					$	1,184,582
Less: Intangible assets					(104,651)			(104,739)						(105,219)
Tangible common equity				$	1,083,244		$	1,085,942					$	1,079,363

Book value per common share				$	36.86		$	35.82					$	34.30
Less: Intangible book value per common share					(3.24)			(3.15)						(3.05)
Tangible book value per common share				$	33.62		$	32.67					$	31.25

Total assets				$	9,799,670		$	8,988,719					$	8,670,003
Less: Intangible assets					(104,651)			(104,739)						(105,219)
Tangible assets				$	9,695,019		$	8,883,980					$	8,564,784
Tangible common equity ratio					11.17	%		12.22	%					12.60	%

Average common shareholders’ equity	$	1,179,452		$	1,185,316		$	1,172,051		$	1,166,487		$	1,147,782
Less: Average intangible assets		(104,672)			(104,684)			(105,167)			(105,280)			(105,430)
Average tangible common equity	$	1,074,780		$	1,080,632		$	1,066,884		$	1,061,206		$	1,042,352

Net Income Available to Common Shareholders	$	28,856		$	51,979		$	142,943		$	37,243		$	70,992
Average tangible common equity	$	1,074,780		$	1,080,632		$	1,066,884		$	1,061,206		$	1,042,352
Annualized Return on Average Tangible Common Equity		10.80	%		9.67	%		13.40	%		14.08	%		13.73	%

Three Months Ended Nine Months Ended Twelve Months Ended Three Months Ended Nine Months Ended
September 30, 2019 September 30, 2019 December 31, 2018 September 30, 2018 September 30, 2018
Common shareholders’ equity $ 1,184,594 $ 1,108,941 $ 1,061,651
Less: Intangible assets (104,915 ) (105,766 ) (106,481 )
Tangible common equity $ 1,079,679 $ 1,003,175 $ 955,170

Book value per common share $ 35.13 $ 32.25 $ 30.94
Less: Intangible book value per common share (3.11 ) (3.08 ) (3.10 )
Tangible book value per common share $ 32.02 $ 29.17 $ 27.84

Total assets $ 9,003,467 $ 8,389,137 $ 8,057,855
Less: Intangible assets (104,915 ) (105,766 ) (106,481 )
Tangible assets $ 8,898,552 $ 8,283,371 $ 7,951,374
Tangible common equity ratio 12.13 % 12.11 % 12.01 %

Average common shareholders’ equity $ 1,197,513 $ 1,164,541 $ 1,022,642 $ 1,040,826 $ 1,003,439
Less: Average intangible assets (105,034 ) (105,297 ) (106,806 ) (106,629 ) (106,949 )
Average tangible common equity $ 1,092,479 $ 1,059,245 $ 915,836 $ 934,197 $ 896,490

Net Income Available to Common Shareholders $ 36,495 $ 107,487 $ 152,276 $ 38,949 $ 111,959
Average tangible common equity $ 1,092,479 $ 1,059,245 $ 915,836 $ 934,197 $ 896,490
Annualized Return on Average Tangible Common Equity 13.25 % 13.57 % 16.63 % 16.54 % 16.70 %

(dollars in thousands except per share data) Nine Months Ended September 30, 2019
GAAP Change Non-GAAP
Noninterest Expense
  Nonperforming assets $ 59,137 $ (16,528 ) $ 42,609
  Nonperforming loans $ 57,650 $ (16,528 ) $ 41,122

Other Ratios (annualized):
  Nonperforming assets to total assets 0.66 % 0.47 %
  Nonperforming loans to total loans 0.76 % 0.54 %
  Allowance for credit losses to total nonperforming loans 127.87 % 179.27 %

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Please refer to Item 2 of this report, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” under the caption “Asset/Liability Management and Quantitative and Qualitative Disclosure about Market Risk.”

Item 4. Controls and Procedures

Evaluation of disclosure controls and procedures. ~~Based on~~The Company’s management, under the ~~evaluation~~supervision and with the participation of ~~our~~the Chief Executive Officer, Executive Chairman and Chief Financial Officer, evaluated, as of the last day of the period covered by this report, the effectiveness of the design and operation of the Company’s disclosure controls and procedures, ~~(as~~as defined in ~~Rules~~Rule 13a-15(e) ~~and 15d-15(e))~~ under the ~~Securities~~ Exchange ~~Act of 1934) required by Rules 13a-15(b) or 15d-15(b) under~~Act. Based on that evaluation, the ~~Securities Exchange Act of 1934, our~~ Chief Executive Officer, Executive Chairman and ~~our~~the Chief Financial Officer ~~have~~ concluded that the ~~Company maintained effective~~Company’s disclosure controls and procedures as of ~~September~~June 30, ~~2019.~~2020 were effective to provide reasonable assurance that information required to be disclosed in the reports we file and submit under the Exchange Act is recorded, processed, summarized and reported as and when required and that it is accumulated and communicated to our management, including the Chief Executive Officer, Executive Chairman and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

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Changes in internal ~~controls~~control over financial reporting. There were no changes in our internal control over financial reporting as defined in Exchange Act Rules 13a-15(f) and 15d-15(f) that occurred during the ~~third~~second quarter of ~~2019~~2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial ~~reporting.~~reporting, other than as described below under the caption “Remediation.”

Remediation.

As previously described in Part I, Item 4 of our Annual Report on Form 10-K and our Quarterly Report on Form 10-Q for the quarter ended March 31, 2020, management has been testing the Company’s enhanced controls to determine whether they operate effectively over time. That testing process is now complete and management believes that the enhanced controls are operating effectively and the deficiencies that contributed to the material weakness have been remediated, subject to the results of the year-end audit of the Company’s internal control over financial reporting by Dixon Hughes Goodman LLP (“DHG”), the Company’s independent auditors.

The following contributed to this remediation:

●

the split of the roles of Chairman and Chief Executive Officer and the appointment of our current Chairman, Norman R. Pozez, and our current President and Chief Executive Officer, Susan G. Riel;

●

the restructuring of the Board of Directors to reduce its size and strengthen its risk and financial reporting oversight functions, including the addition of two new independent directors with extensive experience in risk management and public accounting;

●

adjustment of the membership of the committees of the Board of Directors, the appointment of new committee chairs and the establishment of a Risk Committee;

●

the process of hiring a new Chief Legal Officer (effective January 2020);

●

formalizing the Company's ethics program, including establishing an Ethics Office and appointing an Ethics officer with accountability to the Audit Committee, and increased ethics training for Company employees;

●

the enhancement of the Company's policies and procedures for the identification, review and reporting of related party transactions;

●

the reinforcement of the Company's risk management function, including the addition of personnel and the enhanced review and monitoring of vendor contracts; and

●

the active encouragement by management, with the assistance of the Chairman and the rest of the Board of Directors, of an open and collaborative culture, to set an appropriate “tone at the top.”

In addition, in the first quarter of 2020, the following further contributed to this remediation: upon the appointment of our Chairman, Norman R. Pozez, as Executive Chairman of the Board of Directors, the Board of Directors appointed Theresa G. LaPlaca as Lead Independent Director of the Board of Directors.

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PART II - OTHER INFORMATION

Item 1 - Legal Proceedings

There have been no material changes in the status of the legal proceedings previously disclosed in Part I, Item 3 of the Company's Annual Report on Form 10-K for the year ended December 31, 2019, except as follows.

From time to time, the Company and its subsidiaries are ~~participants~~involved in various legal proceedings incidental to their ~~business. In~~business in the ~~opinion of management,~~ordinary course, including matters in which damages in various amounts are claimed. Based on information currently available, the Company does not believe that the liabilities (if any) resulting from such legal proceedings will ~~not~~ have a material effect on the financial position of the Company.

However, in light of the inherent uncertainties involved in such matters, ongoing legal expenses or an adverse outcome in one or more of these matters could materially and adversely affect the Company's financial condition, results of operations or cash flows in any particular reporting period, as well as its reputation.

On July 24, 2019, a putative class action lawsuit was filed in the United States District Court for the Southern District of New York against the Company, its current and former President and Chief Executive Officer and its current and former Chief Financial Officer, on behalf of persons similarly situated, who purchased or otherwise acquired Company securities between March 2, 2015 and July 17, 2019. ~~Shiva Stein vs. Eagle Bancorp, Inc., et. al. (Case 1:19-cv-06873).~~On November 7, 2019, the court appointed a lead plaintiff and lead counsel in that matter, and on January 21, 2020, the lead plaintiff filed an amended complaint on behalf of the same class against the same defendants as well as the Company’s former General Counsel. The plaintiff ~~in the action~~ alleges that certain of the Company’s 10-K reports and other public statements and disclosures contained ~~material misrepresentations,~~materially false or ~~omitted material information,~~misleading statements about, ~~the business, operations and management of the Company, including~~among other things, the effectiveness of its internal controls and related party ~~transactions,~~loans, in violation of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder and Section ~~20(a)~~20 (a) of that act, resulting in injury to the purported class members as a result of the decline in the value of the Company’s common stock following the disclosure of increased legal expenses associated with certain government investigations involving the Company. The ~~relief sought in the lawsuit includes damages. While we continue to review the complaint, the~~ Company ~~believes that the claims asserted are without merit and~~ intends to defend vigorously against ~~them.~~the claims asserted. On April 2, 2020, the defendants filed a motion to dismiss the amended complaint. On May 15, 2020, the plaintiffs filed their opposition to the defendants' motion to dismiss, and on June 15, 2020, the defendants filed their reply brief. Briefing on the defendants' motion is now complete, and the motion is under consideration by the court.

The Company has received various document requests and subpoenas from securities and banking regulators and U.S. Attorney’s offices in connection with investigations, which the Company believes relate to the Company’s identification, classification and disclosure of related party transactions; the retirement of certain former officers and directors; and the relationship of the Company and certain of its former officers and directors with a local public official, among other things. The Company is cooperating with these investigations. There have been no regulatory restrictions placed on the Company’s ability to fully engage in its banking business as presently conducted as a result of these ongoing investigations. We are, however, unable to predict the duration, scope or outcome of these investigations.

Item 1A - Risk Factors

The COVID-19 pandemic has adversely affected, and is likely to continue to adversely affect, our customers and other businesses in our market area, as well as counterparties and third party vendors. The resulting adverse impacts on our business, financial condition, liquidity and results of operations will likely be significant.

~~There~~The COVID-19 pandemic and the resulting containment measures have resulted in widespread economic and financial disruptions that have adversely affected, and are likely to continue to adversely effect, our customers and other businesses in our market area, as well as counterparties and third-party vendors. We are starting to see the impact of the pandemic on our business, which we expect to continue and potentially worsen. This impact has been, ~~no material changes as~~in certain areas, and could continue to be significant, adverse and potentially material. The extent of ~~September 30, 2019~~this impact, and the resulting impact on our business, financial condition, liquidity and results of operations, is unknown at this time, and will depend on a number of evolving factors and future developments beyond our control and that we are unable to predict, including the duration, spread and severity of the pandemic; the nature, extent and effectiveness of containment measures; the timing of development and widespread availability of medical treatments or vaccines; the extent and duration of the effect on the economy, unemployment, consumer confidence and consumer and business spending; the impact and continued availability of monetary, fiscal and other economic policies and programs designed to provide economic assistance to individuals and small businesses; and how quickly and to what extent normal economic and operating conditions can resume. It is also possible that any adverse impacts of the pandemic and containment measures may continue once the pandemic is controlled and the containment measures are lifted.

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Many of the risks described in the risk factors ~~from those disclosed~~and other cautionary language included in the ~~Company’s~~Company's Annual Report on Form 10-K for the year ended December 31, ~~2018.~~2019, the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2020 and in other periodic and current reports filed by the Company with the Securities and Exchange Commission will likely be exacerbated, and the impact of such risks will likely be magnified, as a result of the COVID-19 pandemic. We expect the negative impacts of the COVID-19 pandemic on our business, financial condition, liquidity and results of operations to be the most severe in the following areas:

●Loan Credit Quality. The significant disruption resulting from the COVID-19 pandemic has been materially affecting the businesses of our customers and of their customers, which impacts their creditworthiness, their ability to pay amounts owed to us and our ability to collect those amounts. Among the industry’s most clearly impacted by the pandemic are the Accommodation and Food Service industry, exposure to which represents 10.5% of our loan portfolio as of June 30, 2020, and the Retail Trade industry, which represents 1.3% of our loan portfolio as of June 30, 2020. In addition, approximately 6% of our loan portfolio as of June 30, 2020 is secured by commercial real estate loans secured by restaurants, hotels or retail properties. These areas may have a longer recovery period than other industries. Deteriorating economic conditions are also likely to result in declines in real estate values and home sales volumes, and an increase in tenants failing to make or deferring rent payments. A large portion of our loan portfolio is related to real estate, with 72% consisting of commercial real estate and real estate construction loans, and 79% of our loans being secured by real estate. As a result of actual or expected credit losses, we may downgrade loans, increase our allowance for loan losses, and write-down or charge-off credit relationships, any of which would negatively impact our results of operations. In addition, market upheavals are likely to affect the value of real estate and commercial assets. In the event of foreclosure, it is unlikely that we will be able to sell the foreclosed property at a price that will allow us to recoup a significant portion of the delinquent loan.

●Allowance for Credit Losses. As discussed in the Management’s Discussion and Analysis, we began using a new credit reserving methodology known as the CECL methodology effective January 1, 2020. Our ability to accurately forecast future losses under that methodology may be impaired by the significant uncertainty surrounding the pandemic and containment measures and the lack of a comparable precedent. For the three and six months ended June 30, 2020, after the initial adjustment to the allowance for credit losses as of January 1, 2020, we further increased the allowance for credit losses by $19.7 million and $34.0 million, respectively, inclusive of $138 thousand of allowance for credit losses on AFS debt securities recorded in the second quarter of 2020. We may need to record additional provisions for credit losses in future, as the COVID-19 pandemic continues to evolve, and our losses on our loans and other exposures could exceed our allowance.

●Increased Demands on Capital and Liquidity. We have begun to experience increased volume of loan originations, particularly SBA loans pursuant to the PPP created by recent legislation. Certain of these SBA loans have mandated interest rates that are lower than our usual rates and may not be purchased by the SBA or other third parties within expected timeframes. In addition, borrowers may draw on existing lines of credit or seek additional loans to finance their businesses. These factors may result in reduced levels of capital and liquidity being available to originate more profitable loans, which will negatively impact our ability to serve our existing customers and our ability to attract new customers.

●Deposit Business. As a result of the COVID-19 pandemic, deposit customers are expected to retain higher levels of cash. While increased low-interest deposits could have a positive impact in the short-term, we would not expect these funds to be replenished as customers use deposit funds for liquidity for their business and individual needs. If deposit levels decline, our available liquidity would decline, and we could be forced to obtain liquidity on terms less favorable than current deposit terms, which would in turn compress margins and negatively impact our results of operations.

●Interest Rate Risk. Our net interest income, lending activities, deposits and profitability could be negatively affected by volatility in interest rates caused by uncertainties stemming from the COVID-19 pandemic. In March 2020, the Federal Reserve lowered the target range for the federal funds rate to a range from 0 to 0.25 percent. A prolonged period of extremely volatile and unstable market conditions would likely increase our funding costs and negatively affect market risk mitigation strategies. Higher income volatility from changes in interest rates and spreads to benchmark indices could cause a loss of future net interest income and a decrease in current fair market values of our assets. Fluctuations in interest rates will impact both the level of income and expense recorded on most of our assets and liabilities and the market value of all interest-earning assets and interest-bearing liabilities, which in turn could have a material adverse effect on our net income, operating results or financial condition.

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●Operational Risk. Current and future restrictions on our workforce's access to our facilities could limit our ability to meet customer servicing expectations and have a material adverse effect on our operations. We rely on business processes and branch activity that largely depend on people and technology, including access to information technology systems as well as information, applications, payment systems and other services provided by third parties. In response to COVID-19, we have modified our business practices by directing a portion of our employees to work remotely from their homes to minimize interruptions to our operations. These actions will likely result in increased spending on our business continuity efforts, such as technology and readiness procedures for returning to our offices. We could also experience an increased strain on our risk management policies, including, but not limited to, the effectiveness and accuracy of our models, given the lack of data inputs and comparable precedent. Further, technology in employees' homes may not be as robust as in our offices and could cause the networks, information systems, applications, and other tools available to employees to be more limited or less reliable than in our offices. The continuation of these work-from-home measures also introduces additional operational risk, including related to the effectiveness of our anti-money laundering and other compliance programs, as well as increased cybersecurity risk. These cyber risks include greater phishing, malware, and other cybersecurity attacks, vulnerability to disruptions of our information technology infrastructure and telecommunications systems for remote operations, increased risk of unauthorized dissemination of confidential information, limited ability to restore the systems in the event of a systems failure or interruption, greater risk of a security breach resulting in destruction or misuse of valuable information, and potential impairment of our ability to perform critical functions, including wiring funds, all of which could expose us to risks of data or financial loss, litigation and liability and could seriously disrupt our operations and the operations of any impacted customers.

●External Vendors and Service Providers. We rely on many outside service providers that support our day-to-day operations including data processing and electronic communications, real estate appraisal, loan servicers and local and federal government agencies, offices and courthouses. In light of the containment measures responding to COVID- 19, many of these entities may limit the availability and access of their services, which may impact our business. For example, loan origination could be delayed due to the limited availability of real estate appraisers for the collateral. Loan closings could be delayed related to reductions in available staff in recording offices or the closing of courthouses, which slows the process for title work, mortgage and UCC filings. If the third-party service providers continue to have limited capacities for a prolonged period or if additional limitations or potential disruptions in these services materialize, it may negatively affect our operations.

●Strategic and Reputational Risk. The pandemic and containment measures have caused us to modify our strategic plans and business practices, and we may take further actions that we determine are in the best interests of our colleagues, customers and business partners. If we do not respond appropriately to the pandemic, or if customers or other stakeholders do not perceive our response to be adequate, we could suffer damage to our reputation and our brand, which could materially adversely affect our business. We also face an increased risk of litigation and governmental and regulatory scrutiny as a result of the effects of the pandemic on market and economic conditions and actions governmental authorities take in response to those conditions, including as a result of our participation in the PPP as detailed in the Note 1 to the Consolidated Financial Statements.

Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds


(a) Sales of Unregistered ~~Securities~~Securities.	None

	(b) Use of ~~Proceeds~~Proceeds.	Not Applicable

	(c) Issuer Purchases of ~~Securities~~Securities.

Period Total Number of Shares Purchased Average Price Paid Per Share Total Number of Shares Purchased as Part of Publicly Announced Plan or Program Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs (1)
July 1-31, 2019 — $ — — —
August 1-31, 2019 610,500 39.90 610,500 1,105,047
September 1-30, 2019 211,700 42.54 211,700 893,347
Total 822,200 40.58 822,200 893,347

~~(1) In August 2019, the Company’s Board~~Table of Directors authorized the purchase of up to 1,715,547 shares of the Company’s common stock from the date of approval of the plan through December 31, 2019, subject to earlier termination by the Board of Directors (the “Repurchase Program”). The Repurchase Program was announced by a press release dated August 9, 2019 and a Form 8-K filed on August 9, 2019. Under the Repurchase Program, the Company may acquire its common stock in the open market or in privately negotiated transactions, including 10b5-1 plans. The Repurchase Program may be modified, suspended or terminated by the Board of Directors at any time without notice. No shares were purchased during the three months ended September 30, 2019 other than pursuant to the Repurchase Program. Contents


	Total Number of	Average Price		Total Number of Shares Purchased as Part	Maximum Number of Shares that May Yet Be
Period	Shares Purchased (2)	Paid Per Share		of Publicly Announced Plans or Programs	Purchased Under the Plans or Programs (1)
April 1-30, 2020	58	$	44.60	58	447,890
May 1-31, 2020	—		—	—	447,890
June 1-30, 2020	—		—	—	447,890
Total	58		44.60	58

~~Item 3 - Defaults Upon Senior Securities~~(1)

~~None~~In August 2019, the Company’s Board of Directors authorized the purchase of up to 1,715,547 shares of the Company’s common stock from the date of approval of the plan through December 31, 2019, subject to earlier termination by the Board of Directors. The program was announced by a press release dated August 9, 2019 and a Form 8-K filed on August 9, 2019. On December 18, 2019, the Company’s Board of Directors extended and expanded the program, authorizing the purchase of up to an aggregate of 1,641,000 shares of the Company’s common stock (inclusive of shares remaining under the initial authorization), through December 31, 2020, subject to earlier termination by the Board of Directors (as extended, the “Repurchase Program”). The extension of the program was announced by a press release dated December 18, 2019 and a Form 8-K filed on December 18, 2019. Under the Repurchase Program, the Company may acquire its common stock in the open market or in privately negotiated transactions, including 10b5-1 plans. The Repurchase Program may be modified, suspended or terminated by the Board of Directors at any time without notice. We suspended our share repurchase program during the first quarter of 2020, and did not repurchase any shares during the second quarter of 2020.

(2)	Includes shares of the Company’s common stock acquired by the Company in connection with satisfaction of tax withholding obligations on vested restricted shares.

~~Item 4 - Mine Safety Disclosures~~

~~Not Applicable~~

Item 3 - Defaults Upon Senior Securities

None

Item 4 - Mine Safety Disclosures

Not Applicable

Item 5 - Other Information


(a)Required 8-K Disclosures	None


(b) Changes in Procedures for Director Nominations	None

6479

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Item 6 - Exhibits

3.1		Certificate of Incorporation of the Company, as amended (1)
3.2		Bylaws of the Company (2)
4.1		Subordinated Indenture, dated as of August 5, 2014, between the Company and Wilmington Trust, National Association, as Trustee (3)
4.2		First Supplemental Indenture, dated as of August 5, 2014, between the Company and Wilmington Trust, National Association, as Trustee (4)
4.3		Form of Global Note representing the 5.75% Subordinated Notes due September 1, 2024 (included in Exhibit 4.2)
4.4		Second Supplemental Indenture, dated as of July 26, 2016, between the Company and Wilmington Trust, National Association, as Trustee (5)
4.5		Form of Global Note representing the 5.00% Fixed-to-Floating Rate Subordinated Notes due August 1, 2026 (included in Exhibit 4.4)
10.1	~~2016~~	Restricted Stock ~~Option Plan (6)~~
~~10.2~~	~~2006 Stock Plan (7)~~
~~10.3~~	~~Employment~~Award Agreement ~~dated as of April 7, 2017, between EagleBank and Charles D. Levingston (8)~~
~~10.4~~	~~Amended and Restated Employment Agreement dated as of January 31, 2017, between EagleBank and Antonio F. Marquez (9)~~
~~10.5~~	~~Amended and Restated Employment Agreement dated as of January 31, 2017, between EagleBank and Susan G. Riel (10)~~
~~10.6~~	~~Amended and Restated Employment Agreement dated as of January 31, 2017, between EagleBank and Janice L. Williams (11)~~
~~10.7~~	~~Non-Compete Agreement dated as of April 7, 2017, between EagleBank and Charles D. Levingston (12)~~
~~10.8~~	~~Non-Compete Agreement dated as of August 1, 2014, between EagleBank and Antonio F. Marquez (13)~~
~~10.9~~	~~Non-Compete Agreement dated as of August 1, 2014, between EagleBank and Susan G. Riel (14)~~
~~10.10~~	~~Non-Compete Agreement dated as of August 1, 2014, between EagleBank and Janice L. Williams (15)~~
~~10.11~~	~~Form of Supplemental Executive Retirement Plan Agreement (16)~~
~~10.12~~	~~Amended and Restated Employment Agreement dated as of January 31, 2017 between EagleBank and Lindsey S. Rheaume (17)~~
~~10.13~~	~~Non-Compete Agreement dated as of December 15, 2014, between EagleBank and Lindsey S. Rheaume (18)~~
~~10.14~~	~~Virginia Heritage Bank 2006 Stock Option Plan (19)~~
~~10.15~~	~~Virginia Heritage Bank 2010 Long-Term Incentive Plan (20)~~
~~10.16~~	~~First Amendment to Employment Agreement of Charles D. Levingston (21)~~
~~10.17~~	~~First Amendment to Amended and Restated Employment Agreement of Antonio F. Marquez (22)~~
~~10.18~~	~~First Amendment to Amended and Restated Employment Agreement of Susan G. Riel (23)~~
~~10.19~~	~~First Amendment to Amended and Restated Employment Agreement of Janice L. Williams (24)~~
~~10.20~~	~~First Amendment to Amended and Restated Employment Agreement of Lindsey S. Rheaume (25)~~
~~10.21~~	~~2019 Senior Executive Incentive Plan (26)~~
~~10.22~~	~~2019 Long Term Incentive Plan (27)~~
~~10.23~~	~~Chairman Compensation Agreement dated as of May 31, 2019 among Eagle Bancorp, Inc. Eagle Bank and~~for Norman R. Pozez dated April 2, 2020 (6)
~~10.24~~ 31.1	~~Non-Compete Agreement dated as of May 31, 2019 among Eagle Bancorp, Inc. Eagle Bank and Norman R. Pozez~~
11	~~Statement Regarding Computation of Per Share Income~~
	~~See Note 11 of the Notes to Consolidated Financial Statements~~

21	~~Subsidiaries of the Registrant~~
~~31.1~~	Certification of Susan G. Riel
31.2		Certification of Norman R. Pozez
31.3		Certification of Charles D. Levingston
32.1		Certification of Susan G. Riel
32.2		Certification of Norman R. Pozez
32.3		Certification of Charles D. Levingston
101		Interactive data files pursuant to Rule 405 of Regulation S-T:

		(i)	Consolidated Balance Sheets at ~~September~~June 30, ~~2019,~~2020, December 31, ~~2018~~
		2019 (ii)	Consolidated Statement of Operations for the three and ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 and ~~2018~~
		2019 (iii)	Consolidated Statement of Comprehensive Income for the three and ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 and ~~2018~~

2019

(iv)

Consolidated Statement of Changes in Shareholders’ Equity for the three and ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 and ~~2018~~

2019

(v)

Consolidated Statement of Cash Flows for the ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 and ~~2018~~

2019

(vi)

Notes to the Consolidated Financial Statements

~~(1)~~	~~Incorporated by reference to the Exhibit of the same number to the Company’s Current Report on Form 8-K filed on May 17, 2016.~~
~~(2)~~ 104	~~Incorporated by reference to Exhibit 3.2 to the Company’s Current Report on Form 8-K filed on December 18, 2017.~~
~~(3)~~	~~Incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on August 5, 2014.~~
~~(4)~~	~~Incorporated by reference to Exhibit 4.2 to the Company’s Current Report on Form 8-K filed on August 5, 2014.~~
~~(5)~~	~~Incorporated by Reference to Exhibit 4.2 to the Company’s Current report on Form 8-K filed on July 22, 2016.~~
~~(6)~~	~~Incorporated by reference to Exhibit 4 to the Company’s Registration Statement on Form S-8 (Registration No. 333-211857) filed on June 6, 2016.~~
~~(7)~~	~~Incorporated by reference to Exhibit 4 to the Company’s Registration Statement on Form S-8 (No. 333-187713)~~
~~(8)~~	~~Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on April 11, 2017.~~
~~(9)~~	~~Incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on February 6, 2017.~~
~~(10)~~	~~Incorporated by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K filed on February 6, 2017.~~
~~(11)~~	~~Incorporated by reference to Exhibit 10.5 to the Company’s Current Report on Form 8-K filed on February 6, 2017.~~
~~(12)~~	~~Incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on April 11, 2017.~~
~~(13)~~	~~Incorporated by reference to Exhibit 10.7 to the Company’s Current Report on Form 8-K filed on December 15, 2014.~~
~~(14)~~	~~Incorporated by reference to Exhibit 10.9 to the Company’s Current Report on Form 8-K filed on December 15, 2014.~~
~~(15)~~	~~Incorporated by reference to Exhibit 10.10 to the Company’s Current Report on Form 8-K filed on December 15, 2014.~~
~~(16)~~	~~Incorporated by reference to Exhibit 10.22 to the Company’s~~ The cover page of this Annual Report on Form 10-K, ~~for the Year ended December 31, 2013.~~
~~(17)~~	~~Incorporated by reference to Exhibit 10.7 to the Company’s current Report on Form 8-K filed on February 6, 2017.~~
~~(18)~~	~~Incorporated by reference to Exhibit 10.29 to the Company’s Form 10-Q for the Quarter ended March 31, 2015.~~
~~(19)~~	~~Incorporated by reference to Exhibit 4.1 to the Company’s Registration Statement on Form S-8 (No. 333-199875)~~
~~(20)~~	~~Incorporated by reference to Exhibit 4.2 to the Company’s Registration Statement on Form S-8 (No. 333-199875)~~
~~(21)~~	~~Incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on February 28, 2018.~~
~~(22)~~	~~Incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed on February 28, 2018.~~
~~(23)~~	~~Incorporated by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K filed on February 28, 2018.~~
~~(24)~~	~~Incorporated by reference to Exhibit 10.5 to the Company’s Current Report on Form 8-K filed on February 28, 2018.~~
~~(25)~~	~~Incorporated by reference to Exhibit 10.7 to the Company’s Current Report on Form 8-K filed on February 28, 2018.~~
~~(26)~~	~~Incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on February 15, 2019.~~
~~(27)~~	~~Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on February 15, 2019.~~
		formatted in Inline XBRL

(1)Incorporated by reference to the Exhibit of the same number to the Company’s Current Report on Form 8-K filed on May 17, 2016.

(2)Incorporated by reference to Exhibit 3.2 to the Company’s Current Report on Form 8-K filed on December 18, 2017.

(3)Incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on August 5, 2014.

(4)Incorporated by reference to Exhibit 4.2 to the Company’s Current Report on Form 8-K filed on August 5, 2014.

(5)Incorporated by reference to Exhibit 4.2 to the Company’s Current report on Form 8-K filed on July 22, 2016.

(6)Incorporated by reference to Exhibit 10.16 to the Company’s Form 10-Q for the Quarter ended March 31, 2020.

~~SIGNATURES~~

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	EAGLE BANCORP, INC.

Date: ~~November 12, 2019~~August 10, 2020	By:	/s/ Susan G. Riel
		Susan G. Riel, President and Chief Executive Officer of the Company




Date: ~~November 12, 2019~~August 10, 2020	By:	/s/ Charles D. Levingston
		Charles D. Levingston, Executive Vice President and Chief Financial Officer of the Company

6781

☒
☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
	OF THE SECURITIES EXCHANGE ACT OF 1934

		For the Quarterly Period Ended ~~September~~June 30, ~~2019~~	2020

		OR

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
	OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _________ to _________

Commission File Number 0-25923

~~Maryland~~		~~52-2061461~~
Maryland	52-2061461
(State or other jurisdiction of		~~(I.R.S. Employer~~
incorporation or organization)		(I.R.S. Employer Identification No.)

7830 Old Georgetown Road,, Third Floor,, Bethesda,, Maryland		20814
(Address of principal executive offices)		(Zip Code)



Title of Each Class	Trading Symbol(s)	Name of Each Exchange on Which Registered
Common Stock, $0.01 par value	EGBN	The Nasdaq Stock Market, LLC


Large accelerated filer ☒	Accelerated filer ☐
	Non-accelerated filer ☐	Smaller Reporting Company ☐
		Emerging Growth Company ☐


PART I.	FINANCIAL INFORMATION

Item 1.	Financial Statements (Unaudited)	3
	Consolidated Balance Sheets	3
	Consolidated Statements of Operations	4
	Consolidated Statements of Comprehensive Income	5
	Consolidated Statements of Changes in Shareholders’ Equity	6
	Consolidated Statements of Cash Flows	7
	Notes to Consolidated Financial Statements	8

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	37 45

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	61 74

Item 4.	Controls and Procedures	62 74

PART II.	OTHER INFORMATION	62

Item 1.	Legal Proceedings	62 76

Item 1A.	Risk Factors	62 76

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	62 78

Item 3.	Defaults Upon Senior Securities	62 79

Item 4.	Mine Safety Disclosures	62 79

Item 5.	Other Information	62 79

Item 6.	Exhibits	62 80

Signatures		65 81


									Accumulated
									Other
		Common			Additional Paid		Retained		Comprehensive		Shareholders'
		Shares	Amount		in Capital		Earnings		Income		Equity
Balance April 1, 2020		32,197,258	$	320	$	439,321	$	710,072	$	13,065	$	1,162,778

Net Income		—		—		—		28,856		—		28,856
Other comprehensive income, net of tax		—		—		—		—		1,603		1,603
Stock-based compensation expense		—		—		1,427		—		—		1,427
Vesting of time based stock awards issued at date of grant, net of shares withheld for payroll taxes		(2,738)		—		—		—		—		—
Time based stock awards granted		24,068		—		—		—		—		—
Issuance of common stock related to employee stock purchase plan		6,168		—		186		—		—		186
Cash dividends declared ($0.22 per share)		—		—		—		(6,955)		—		(6,955)
Balance June 30, 2020		32,224,756	$	320	$	440,934	$	731,973	$	14,668	$	1,187,895

Balance April 1, 2019		34,537,193	$	343	$	530,894	$	618,243	$	(992)	$	1,148,488
Net Income		—		—		—		37,243		—		37,243
Other comprehensive income, net of tax		—		—		—		—		4,759		4,759
Stock-based compensation expense		—		—		1,471		—		—		1,471
Issuance of common stock related to options exercised, net of shares withheld for payroll taxes		750		—		37		—		—		37
Vesting of time based stock awards issued at date of grant, net of shares withheld for payroll taxes		(1,800)		—		—		—		—		—
Issuance of common stock related to employee stock purchase plan	��	3,710		—		183		—		—		183
Cash dividends declared ($0.22 per share)		—		—		—		(7,599)		—		(7,599)
Balance June 30, 2019		34,539,853	$	343	$	532,585	$	647,887	$	3,767	$	1,184,582


								Accumulated
				Additional				Other
	Common			Paid		Retained		Comprehensive			Shareholders’
	Shares	Amount		in Capital		Earnings		Income			Equity
Balance January 1, 2020	33,241,496	$	331	$	482,286	$	705,105	$	2,959		$	1,190,681
										��
Cumulative effect adjustment due to the adoption of ASC 326, net of tax	—		—		—		(10,931)		—			(10,931)
Net Income	—		—		—		51,979		—			51,979
Other comprehensive income, net of tax	—		—		—		—		11,709			11,709
Stock-based compensation expense	—		—		2,423		—		—			2,423
Vesting of time based stock awards issued at date of grant, net of shares withheld for payroll taxes	(24,921)		—		—		—		—			—
Vesting of performance based stock awards, net of shares withheld for payroll taxes	4,126		—		—		—		—			—
Time based stock awards granted	176,252		—		—		—		—			—
Issuance of common stock related to employee stock purchase plan	10,644		—		382		—		—			382
Cash dividends declared ($0.44 per share)	—		—		—		(14,180)		—			(14,180)
Common stock repurchased	(1,182,841)		(11)	$	(44,157)		—		—			(44,168)
Balance June 30, 2020	32,224,756	$	320	$	440,934	$	731,973	$	14,668		$	1,187,895

Balance January 1, 2019	34,387,919	$	342	$	528,380	$	584,494	$	(4,275)		$	1,108,941

Net Income	—		—		—		70,992		—			70,992
Other comprehensive income, net of tax	—		—		—		—		8,042			8,042
Stock-based compensation expense	—		—		3,501		—		—			3,501
Issuance of common stock related to options exercised, net of shares withheld for payroll taxes	26,784		—		332		—		—			332
Vesting of time based stock awards issued at date of grant, net of shares withheld for payroll taxes	(12,744)		1		(1)		—		—			—
Vesting of performance based stock awards, net of shares withheld for payroll taxes	17,655		—		—		—		—			—
Time based stock awards granted	112,636		—		—		—		—			—
Issuance of common stock related to employee stock purchase plan	7,603		—		373		—		—			373
Cash dividends declared ($0.22 per share)	—		—		—		(7,599)		—			(7,599)
Balance June 30, 2019	34,539,853	$	343	$	532,585	$	647,887	$	3,767		$	1,184,582


	Common						Additional Paid			Retained			Accumulated Other Comprehensive			Total Shareholders’
	Shares			Amount			in Capital			Earnings			Income (Loss)			Equity
Balance July 1, 2019		34,539,853		$	343		$	532,585		$	647,887		$	3,767		$	1,184,582

Net Income		—			—			—			36,495			—			36,495
Other comprehensive income, net of tax		—			—			—			—			870			870
Stock-based compensation expense		—			—			3,147			—			—			3,147
Vesting of time based stock awards issued at date of grant, net of shares withheld for payroll taxes		(1,251	)		—			—			—			—			—
Issuance of common stock related to employee stock purchase plan		4,120			—			213			—			—			213
Cash dividends declared ($0.22 per share)		—			—			—			(7,327	)		—			(7,327	)
Common stock repurchased		(822,200	)		(7	)		(33,379	)		—			—			(33,386	)
Balance September 30, 2019		33,720,522		$	336		$	502,566		$	677,055		$	4,637		$	1,184,594

Balance July 1, 2018		34,305,071		$	341		$	524,176		$	505,229		$	(6,609	)	$	1,023,137

Net Income		—			—			—			38,948			—			38,948
Other comprehensive loss, net of tax		—			—			—			—			(2,681	)		(2,681	)
Stock-based compensation expense		—			—			2,031			—			—			2,031
Vesting of time based stock awards issued at date of grant, net of shares withheld for payroll taxes		(320	)		—			—			—			—			—
Issuance of common stock related to employee stock purchase plan		3,722			—			216			—			—			216
Balance September 30, 2018		34,308,473		$	341		$	526,423		$	544,177		$	(9,290	)	$	1,061,651

Balance January 1, 2019		34,387,919		$	342		$	528,380		$	584,494		$	(4,275	)	$	1,108,941

Net Income		—			—			—			107,487			—			107,487
Other comprehensive income, net of tax		—			—			—			—			8,912			8,912
Stock-based compensation expense		—			—			6,648			—			—			6,648
Issuance of common stock related to options exercised, net of shares withheld for payroll taxes		26,784			—			332			—			—			332
Vesting of time based stock awards issued at date of grant, net of shares withheld for payroll taxes		(13,995	)		1			(1	)		—			—			—
Vesting of performance based stock awards, net of shares withheld for payroll taxes		17,655			—			—			—			—			—
Time based stock awards granted		112,636			—			—			—			—			—
Issuance of common stock related to employee stock purchase plan		11,723			—			585			—			—			585
Cash dividends declared ($0.44 per share)		—			—			—			(14,926	)		—			(14,926	)
Common stock repurchased		(822,200	)		(7	)		(33,378	)		—			—			(33,385	)
Balance September 30, 2019		33,720,522		$	336		$	502,566		$	677,055		$	4,637		$	1,184,594

Balance January 1, 2018		34,185,163		$	340		$	520,304		$	431,544		$	(1,750	)	$	950,438

Net Income		—			—			—			111,959			—			111,959
Other comprehensive loss, net of tax		—			—			—			—			(6,866	)		(6,866	)
Stock-based compensation expense		—			—			5,174			—			—			5,174
Issuance of common stock related to options exercised, net of shares withheld for payroll taxes		32,230			—			338			—			—			338
Vesting of time based stock awards issued at date of grant, net of shares withheld for payroll taxes		(13,681	)		1			(1	)		—			—			—
Time based stock awards granted		94,344			—			—			—			—			—
Issuance of common stock related to employee stock purchase plan		10,417			—			608			—			—			608
Reclassification of the income tax effects of the Tax Cuts and Jobs Act from AOCI (ASU 2018-02)		—			—			—			674			(674	)		—
Balance September 30, 2018		34,308,473		$	341		$	526,423		$	544,177		$	(9,290	)	$	1,061,651

			Gross		Gross		Estimated
September 30, 2019	Amortized		Unrealized		Unrealized		Fair
(dollars in thousands)	Cost		Gains		Losses		Value
U. S. agency securities	$	171,585	$	941	$	706	$	171,820
Residential mortgage backed securities		434,042		5,404		1,417		438,029
Municipal bonds		61,680		2,278		—		63,958
Corporate bonds		9,532		82		—		9,614
U.S. Treasury		24,919		7		—		24,926
Other equity investments		198		—		—		198
	$	701,956	$	8,712	$	2,123	$	708,545

			Gross		Gross		Estimated
December 31, 2018	Amortized		Unrealized		Unrealized		Fair
(dollars in thousands)	Cost		Gains		Losses		Value
U. S. agency securities	$	260,150	$	228	$	4,033	$	256,345
Residential mortgage backed securities		477,949		1,575		7,293		472,231
Municipal bonds		45,814		439		484		45,769
Corporate bonds		9,503		79		6		9,576
Other equity investments		218		—		—		218
	$	793,634	$	2,321	$	11,816	$	784,139


			Less than				12 Months
			12 Months				or Greater				Total
			Estimated				Estimated				Estimated
September 30, 2019	Number of		Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
(dollars in thousands)	Securities		Value		Losses		Value		Losses		Value		Losses
U. S. agency securities		32	$	36,162	$	132	$	59,843	$	574	$	96,005	$	706
Residential mortgage backed securities		98		53,769		287		116,438		1,130		170,207		1,417
Municipal bonds		1		30		—		—		—		30		—
		131	$	89,961	$	419	$	176,281	$	1,704	$	266,242	$	2,123

				Income Producing - Commercial			Owner Occupied - Commercial			Real Estate Mortgage -			Construction - Commercial and			Home			Other
(dollars in thousands)	Commercial			Real Estate			Real Estate			Residential			Residential			Equity			Consumer			Total

Three Months Ended September 30, 2019
Allowance for credit losses:
Balance at beginning of period	$	18,136		$	27,010		$	5,756		$	1,355		$	19,006		$	581		$	242		$	72,086
Loans charged-off		(1,794	)		—			—			—			—			—			—			(1,794	)
Recoveries of loans previously charged-off		210			—			—			—			15			—			17			242
Net loans charged-off		(1,584	)		—			—			—			15			—			17			(1,552	)
Provision for credit losses		1,617			1,517			(158	)		(3	)		251			(6	)		(32	)		3,186
Ending balance	$	18,169		$	28,527		$	5,598		$	1,352		$	19,272		$	575		$	227		$	73,720

Nine Months Ended September 30, 2019
Allowance for credit losses:
Balance at beginning of period	$	15,857		$	28,034		$	6,242		$	965		$	18,175		$	599		$	72		$	69,944
Loans charged-off		(1,799	)		(5,343	)		—			—			—			—			(2	)		(7,144	)
Recoveries of loans previously charged-off		377			302			2			3			52			—			38			774
Net loans (charged-off) recoveries		(1,422	)		(5,041	)		2			3			52			—			36			(6,370	)
Provision for credit losses		3,734			5,534			(646	)		384			1,045			(24	)		119			10,146
Ending balance	$	18,169		$	28,527		$	5,598		$	1,352		$	19,272		$	575		$	227		$	73,720

As of September 30, 2019
Allowance for credit losses:
Individually evaluated for impairment	$	8,196		$	1,200		$	375		$	650		$	—		$	13		$	—		$	10,434
Collectively evaluated for impairment		9,973			27,327			5,223			702			19,272			562			227			63,286
Ending balance	$	18,169		$	28,527		$	5,598		$	1,352		$	19,272		$	575		$	227		$	73,720

Three Months Ended September 30, 2018
Allowance for credit losses:
Balance at beginning of period	$	12,206		$	27,988		$	6,003		$	757		$	18,651		$	673		$	331		$	66,609
Loans charged-off		(1,174	)		—			—			—			(643	)		—			(15	)		(1,832	)
Recoveries of loans previously charged-off		60			—			—			1			899			6			5			971
Net loans (charged-off) recoveries		(1,114	)		—			—			1			256			6			(10	)		(861	)
Provision for credit losses		4,557			(601	)		(72	)		(9	)		(1,368	)		(48	)		(18	)		2,441
Ending balance	$	15,649		$	27,387		$	5,931		$	749		$	17,539		$	631		$	303		$	68,189

Nine Months Ended September 30, 2018
Allowance for credit losses:
Balance at beginning of period	$	13,102		$	25,376		$	5,934		$	944		$	18,492		$	770		$	140		$	64,758
Loans charged-off		(2,435	)		(121	)		(132	)		—			(1,160	)		—			(15	)		(3,863	)
Recoveries of loans previously charged-off		86			2			2			4			994			133			13			1,234
Net loans (charged-off) recoveries		(2,349	)		(119	)		(130	)		4			(166	)		133			(2	)		(2,629	)
Provision for credit losses		4,896			2,130			127			(199	)		(787	)		(272	)		165			6,060
Ending balance	$	15,649		$	27,387		$	5,931		$	749		$	17,539		$	631		$	303		$	68,189

As of September 30, 2018
Allowance for credit losses:
Individually evaluated for impairment	$	6,271		$	3,043		$	500		$	—		$	—		$	—		$	56		$	9,870
Collectively evaluated for impairment		9,378			24,344			5,431			749			17,539			631			247			58,319
Ending balance	$	15,649		$	27,387		$	5,931		$	749		$	17,539		$	631		$	303		$	68,189

			Income Producing -		Owner Occupied -		Real Estate		Construction -
			Commercial		Commercial		Mortgage -		Commercial and		Home		Other
(dollars in thousands)	Commercial		Real Estate		Real Estate		Residential		Residential		Equity		Consumer		Total

September 30, 2019
Recorded investment in loans:
Individually evaluated for impairment	$	28,155	$	39,089	$	6,616	$	5,365	$	9,148	$	750	$	—	$	89,123
Collectively evaluated for impairment		1,438,707		3,773,195		949,729		99,198		1,126,557		80,367		2,285		7,470,038
Ending balance	$	1,466,862	$	3,812,284	$	956,345	$	104,563	$	1,135,705	$	81,117	$	2,285	$	7,559,161

December 31, 2018
Recorded investment in loans:
Individually evaluated for impairment	$	8,738	$	61,747	$	5,307	$	1,228	$	7,012	$	487	$	—	$	84,519
Collectively evaluated for impairment		1,544,374		3,195,153		882,507		105,190		1,090,600		86,116		2,988		6,906,928
Ending balance	$	1,553,112	$	3,256,900	$	887,814	$	106,418	$	1,097,612	$	86,603	$	2,988	$	6,991,447

(dollars in thousands)	September 30, 2019		December 31, 2018

Commercial	$	16,074	$	7,115
Income producing - commercial real estate		5,654		1,766
Owner occupied - commercial real estate		4,124		2,368
Real estate mortgage - residential		5,635		1,510
Construction - commercial and residential		9,148		3,031
Home equity		487		487
Total nonaccrual loans (1)(2)	$	41,122	$	16,277

	Unpaid		Recorded		Recorded
	Contractual		Investment		Investment		Total				Average Recorded Investment				Interest Income Recognized
	Principal		With No		With		Recorded		Related		Quarter		Year		Quarter			Year
(dollars in thousands)	Balance		Allowance		Allowance		Investment		Allowance		To Date		To Date		To Date			To Date

September 30, 2019
Commercial	$	18,243	$	5,641	$	11,331	$	16,972	$	8,196	$	16,967	$	15,638	$	117		$	220
Income producing - commercial real estate		10,041		1,853		8,188		10,041		1,200		9,497		19,479		412			510
Owner occupied - commercial real estate		7,407		6,630		777		7,407		375		6,113		5,693		120			213
Real estate mortgage – residential		5,635		3,179		2,456		5,635		650		5,638		5,640		—			—
Construction - commercial and residential		10,308		9,148		—		9,148		—		9,152		7,111		—			15
Home equity		487		487		—		487		13		487		487		—			—
Other consumer		—		—		—		—		—		—		—		—			—
Total	$	52,121	$	26,938	$	22,752	$	49,690	$	10,434	$	47,854	$	54,048	$	649		$	958

December 31, 2018
Commercial	$	8,613	$	2,057	$	6,084	$	8,141	$	4,803	$	10,306	$	8,359	$	(126	)	$	190
Income producing - commercial real estate		21,402		1,720		19,682		21,402		2,465		15,331		12,309		189			550
Owner occupied - commercial real estate		5,731		4,361		1,370		5,731		600		5,746		6,011		47			196
Real estate mortgage – residential		1,510		1,510		—		1,510		—		1,516		1,688		—			2
Construction - commercial and residential		3,031		3,031		—		3,031		1,050		3,031		2,028		—			68
Home equity		487		487		—		487		—		487		491		—			—
Other consumer		—		—		—		—		—		46		69		—			—
Total	$	40,774	$	13,166	$	27,136	$	40,302	$	8,918	$	36,463	$	30,955	$	110		$	1,006


	For the nine months Ended September 30, 2019
	Number of				Income Producing -		Owner Occupied -		Construction -
(dollars in thousands)	Contracts		Commercial		Commercial Real Estate		Commercial Real Estate		Commercial Real Estate		Total
Troubled debt restructurings
Restructured accruing		7	$	898	$	4,387	$	3,283	$	—	$	8,568
Restructured nonaccruing		3		1,521		—		—		—		1,521
Total		10	$	2,419	$	4,387	$	3,283	$	—	$	10,089

Specific allowance			$	—	$	1,000	$	—	$	—	$	1,000

Restructured and subsequently defaulted			$		$	2,300	$	—	$	—	$	2,300

	For the nine months Ended September 30, 2018
	Number of				Income Producing -		Owner Occupied -		Construction -
(dollars in thousands)	Contracts		Commercial		Commercial Real Estate		Commercial Real Estate		Commercial Real Estate		Total
Troubled debt restructurings
Restructured accruing		10	$	4,942	$	9,212	$	3,391	$	—	$	17,545
Restructured nonaccruing		4		723		—		—		—		723
Total		14	$	5,665	$	9,212	$	3,391	$	—	$	18,268

Specific allowance			$	2,000	$	3,500	$	—	$	—	$	5,500

Restructured and subsequently defaulted			$	—	$	937	$	—	$	—	$	937

	Nine Months Ended
(dollars in thousands)	September 30, 2019
Lease Cost
Operating Lease Cost (Cost resulting from lease payments)	$	5,857
Variable Lease Cost (Cost excluded from lease payments)		815
Sublease Income		(282	)
Net Lease Cost	$	6,390

Operating Lease - Operating Cash Flows (Fixed Payments)	$	6,382
Operating Lease - Operating Cash Flows (Liability Reduction)		5,458
Right-of-Use Assets - Operating Leases		26,552
Weighted Average Lease Term - Operating Leases		5.11 years
Weighted Average Discount Rate - Operating Leases		4.00	%

(dollars in thousands)
Twelve Months Ended:
September 30, 2020	$	8,532
September 30, 2021		7,857
September 30, 2022		5,868
September 30, 2023		4,379
September 30, 2024		3,663
Thereafter		4,327
Total Future Minimum Lease Payments		34,626
Amounts Representing Interest		(5,040	)
Present Value of Net Future Minimum Lease Payments	$	29,586

	September 30, 2019					December 31, 2018
	Notional				Balance Sheet	Notional				Balance Sheet
	Amount		Fair Value		Category	Amount		Fair Value		Category

Derivatives designated as hedging instruments

(dollars in thousands)
Interest rate product	$	—	$	—	Other Assets	$	250,000	$	3,727	Other Assets


(dollars in thousands)
Interest rate product	$	100,000	$	348	Other Liabilities	$	—	$	—	Other Liabilities

Derivatives not designated as hedging instruments

(dollars in thousands)
Interest rate product	$	26,000	$	15
Interest rate product		26,517		213
Interest rate product	$	52,517	$	228	Other Assets	$	—	$	—	Other Assets

(dollars in thousands)
Interest rate product	$	26,000	$	15	Other Liabilities	$	—	$	—	Other Liabilities
Interest rate product		26,517		220	Other Liabilities
Other Contracts		27,500		117	Other Liabilities		27,500		59	Other Liabilities
	$	80,017	$	352	Other Liabilities	$	27,500	$	59	Other Liabilities

Derivatives in Subtopic 815-20 Hedging Relationships (dollars in thousands)	Amount of Gain or (Loss) Recognized in OCI on Derivative					Location of Gain or (Loss) Recognized from Accumulated Other Comprehensive Income into Income	Amount of Gain or (Loss) Reclassified from Accumulated OCI into Income
	Three Months Ended September 30,						Three Months Ended September 30,
	2019			2018			2019		2018
Derivatives in Cash Flow Hedging Relationships
Interest Rate Products	$	(107	)	$	849	Interest Expense	$	264	$	214
Total	$	(107	)	$	849		$	264	$	214

	Location and Amount of Gain or (Loss) Recognized in Income on Fair Value
	and Cash Flow Hedging Relationships (in 000's)
	Three Months Ended September 30,				Nine Months Ended September 30,
	2019		2018		2019		2019		2018
	Interest Expense				Interest Expense		Gain on sale of investment securities		Interest Expense
Total amounts of income and expense line items presented in the statement of financial performance in which the effects of fair value or cash flow hedges are recorded	$	264	$	214	$	1,039	$	829	$	16

Gain or (loss) on cash flow hedging relationships in Subtopic 815-20
Interest contracts
Amount of gain or (loss) reclassified from accumulated other comprehensive income into income	$	264	$	214	$	1,039	$	—	$	230
Amount of gain or (loss) reclassified from accumulated other comprehensive income into income as a result that a forecasted transaction is no longer probable of occurring	$	—	$	—	$	—	$	829	$	—
Amount of Gain or (Loss) Reclassified from Accumulated OCI into Income - Included Component	$	264	$	214	$	1,039	$	829	$	230
Amount of Gain or (Loss) Reclassified from Accumulated OCI into Income - Excluded Component	$	—	$	—	$	—	$	—	$	—

Effect of Derivatives Not Designated as Hedging Instruments on the Statement of Financial Performance
Derivatives Not Designated as Hedging Instruments under Subtopic 815-20	Location of Gain or (Loss) Recognized in Income on Derivative	Amount of Gain or (Loss) Recognized in Income on Derivative					Amount of Gain or (Loss) Recognized in Income on Derivative
		Three Months Ended September 30,					Nine Months Ended September 30,
		2019			2018		2019			2018

Interest Rate Products	Other income / (expense)		(7	)				(7	)
Other Contracts	Other income / (expense)		(16	)		—		(58	)		—
Total			(23	)		—		(65	)		—

As of September 30, 2019
Offsetting of Derivative Assets (dollars in thousands)							Gross Amounts Not Offset in the Balance Sheet
	Gross Amounts of Recognized Assets		Gross Amounts Offset in the Balance Sheet		Net Amounts of Assets presented in the Balance Sheet		Financial Instruments		Cash Collateral Posted		Net Amount
Derivatives	$	228	$	—	$	228	$	—	$	—	$	228

Offsetting of Derivative Liabilities (dollars in thousands)							Gross Amounts Not Offset in the Balance Sheet
	Gross Amounts of Recognized Liabilities		Gross Amounts Offset in the Balance Sheet		Net Amounts of Liabilities presented in the Balance Sheet		Financial Instruments		Cash Collateral Posted		Net Amount
Derivatives	$	669	$	—	$	669	$	—	$	—	$	669


As of December 31, 2018
Offsetting of Derivative Assets (dollars in thousands)							Gross Amounts Not Offset in the Balance Sheet
	Gross Amounts of Recognized Assets		Gross Amounts Offset in the Balance Sheet		Net Amounts of Assets presented in the Balance Sheet		Financial Instruments		Cash Collateral Posted		Net Amount
Derivatives	$	3,840	$	—	$	3,840	$	—	$	—	$	3,840


	Three Months Ended September 30,				Nine Months Ended September 30,
(dollars and shares in thousands, except per share data)	2019		2018		2019		2018
Basic:
Net income	$	36,495	$	38,948	$	107,487	$	111,959
Average common shares outstanding		34,233		34,309		34,418		34,292
Basic net income per common share	$	1.07	$	1.14	$	3.12	$	3.26

Diluted:
Net income	$	36,495	$	38,948	$	107,487	$	111,959
Average common shares outstanding		34,233		34,309		34,418		34,292
Adjustment for common share equivalents		23		152		33		152
Average common shares outstanding-diluted		34,256		34,461		34,451		34,444
Diluted net income per common share	$	1.07	$	1.13	$	3.12	$	3.25

Anti-dilutive shares		2		3		20		—


Details about Accumulated Other Comprehensive Income Components (dollars in thousands)	Amount Reclassified from Accumulated Other Comprehensive Income (Loss)						Affected Line Item in the Statement Where Net Income is Presented
	Three Months Ended September 30,
	2019			2018
Realized gain on sale of investment securities	$	153		$	—		Gain on sale of investment securities
Interest income (expense) derivative deposits		285			(211	)	Interest expense on deposits
Income tax (expense) benefit		(123	)		53		Income Tax Expense
Total Reclassifications for the Period	$	315		$	(158	)	Net Income


					Fair Value Measurements
(dollars in thousands)	Carrying Value		Fair Value		Quoted Prices (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
September 30, 2019
Assets
Cash and due from banks	$	6,657	$	6,657	$	—	$	6,657	$	—
Federal funds sold		27,711		27,711		—		27,711		—
Interest bearing deposits with other banks		361,154		361,154		—		361,154		—
Investment securities		708,545		708,545		—		698,733		9,812
Federal Reserve and Federal Home Loan Bank stock		28,725		28,725		—		28,725		—
Loans held for sale		52,199		52,199		—		52,199		—
Loans		7,485,441		7,572,385		—		—		7,572,385
Bank owned life insurance		74,726		74,726		—		74,726		—
Annuity investment		12,103		12,103		—		12,103		—
Interest Rate Caps		228		228		—		228		—
Mortgage banking derivatives		313		313		—		—		313

Liabilities
Noninterest bearing deposits		2,051,106		2,051,106		—		2,051,106		—
Interest bearing deposits		3,952,541		3,952,541		—		3,952,541		—
Certificates of deposit		1,398,866		1,443,542		—		1,443,542		—
Customer repurchase agreements		30,297		30,297		—		30,297		—
Borrowings		317,589		328,330		—		328,330		—
Interest rate swap derivatives		362		362				362		—
Derivative liability		117		117		—		117		—
Interest Rate Caps		235		235		—		235		—
Mortgage banking derivatives		3		3		—		—		3

December 31, 2018
Assets
Cash and due from banks	$	6,773	$	6,773	$	—	$	6,773	$	—
Federal funds sold		11,934		11,934		—		11,934		—
Interest bearing deposits with other banks		303,157		303,157		—		303,157		—
Investment securities		784,139		784,139		—		774,345		9,794
Federal Reserve and Federal Home Loan Bank stock		23,506		23,506		—		23,506		—
Loans held for sale		19,254		19,254		—		19,254		—
Loans		6,921,503		6,921,048		—		—		6,921,048
Bank owned life insurance		73,441		73,441		—		73,441		—
Annuity investment		12,417		12,417		—		12,417		—
Mortgage banking derivatives		229		229		—		—		229
Interest rate swap derivatives		3,727		3,727		—		3,727		—

Liabilities
Noninterest bearing deposits		2,104,220		2,104,220		—		2,104,220		—
Interest bearing deposits		3,542,666		3,542,666		—		3,542,666		—
Certificates of deposit		1,327,400		1,325,209		—		1,325,209		—
Customer repurchase agreements		30,413		30,413		—		30,413		—
Borrowings		217,196		218,006		—		218,006		—
Mortgage banking derivatives		269		269		—		—		269

	September 30,			December 31,
(dollars in thousands)	2019			2018
Nonaccrual Loans:
Commercial	$	16,074		$	7,115
Income producing - commercial real estate		5,654			1,766
Owner occupied - commercial real estate		4,124			2,368
Real estate mortgage - residential		5,635			1,510
Construction - commercial and residential		9,148			3,031
Construction - C&I (owner occupied)		—			—
Home equity		487			487
Other consumer		—			—
Accrual loans-past due 90 days		16,528			—
Total nonperforming loans (1)		57,650			16,277
Other real estate owned		1,487			1,394
Total nonperforming assets	$	59,137		$	17,671

Coverage ratio, allowance for credit losses to total nonperforming loans		127.87	%		429.72	%
Ratio of nonperforming loans to total loans		0.76	%		0.23	%
Ratio of nonperforming assets to total assets		0.66	%		0.21	%

Repricible in:	0-3 months			4-12 months			13-36 months			37-60 months			Over 60 months			Total Rate Sensitive		Non Sensitive		Total
RATE SENSITIVE ASSETS:
Investment securities	$	161,837		$	81,444		$	161,635		$	123,778		$	208,576		$	737,270
Loans (1)(2)		3,878,017			648,834			1,271,654			971,558			841,297			7,611,360
Fed funds and other short-term investments		388,865			—			—			—			—			388,865
Other earning assets		74,726			—			—			—			—			74,726
Total	$	4,503,445		$	730,278		$	1,433,289		$	1,095,336		$	1,049,873		$	8,812,221	$	191,246	$	9,003,467

RATE SENSITIVE LIABILITIES:
Noninterest bearing demand	$	77,850		$	215,716		$	463,364		$	336,501		$	957,675		$	2,051,106
Interest bearing transaction		918,011			—			—			—			—			918,011
Savings and money market		2,809,530			—			—			—			225,000			3,034,530
Time deposits		348,057			550,545			369,117			128,008			3,139			1,398,866
Customer repurchase agreements and fed funds purchased		30,297			—			—			—			—			30,297
Other borrowings		—			—			148,197			69,392			100,000			317,589
Total	$	4,183,745		$	766,261		$	980,678		$	533,901		$	1,285,814		$	7,750,399	$	68,474	$	7,818,873
GAP	$	319,700		$	(35,983	)	$	452,611		$	561,435		$	(235,941	)	$	1,061,822
Cumulative GAP	$	319,700		$	283,717		$	736,328		$	1,297,763		$	1,061,822

Cumulative gap as percent of total assets		3.55	%		3.15	%		8.18	%		14.41	%		11.79	%

OFF BALANCE-SHEET:
Interest Rate Swaps - LIBOR based	$	100,000		$	—		$	(100,000	)	$	—		$	—		$	—
Interest Rate Swaps - Fed Funds based		—			—			—			—			—			—
Total	$	100,000		$	—		$	(100,000	)	$	—		$	—		$	—	$	—	$	—
GAP	$	419,700		$	(35,983	)	$	352,611		$	561,435		$	(235,941	)	$	1,061,822
Cumulative GAP	$	419,700		$	383,717		$	736,328		$	1,297,763		$	1,061,822		$	—
Cumulative gap as percent of total assets		4.66	%		4.26	%		8.18	%		14.41	%		11.79	%

	Company					Bank								To Be Well Capitalized Under Prompt
	Actual					Actual					Minimum Required For			Corrective Action
(dollars in thousands)	Amount		Ratio			Amount		Ratio			Capital Adequacy Purposes			Regulations *
As of September 30, 2019
CET1 capital (to risk weighted assets)	$	1,074,526		12.76	%	$	1,220,452		14.51	%		7.000	%		6.5	%
Total capital (to risk weighted assets)		1,354,313		16.08	%		1,294,239		15.38	%		10.500	%		10.0	%
Tier 1 capital (to risk weighted assets)		1,074,526		12.76	%		1,220,452		14.51	%		8.500	%		8.0	%
Tier 1 capital (to average assets)		1,074,526		12.19	%		1,220,452		13.87	%		4.000	%		5.0	%

As of December 31, 2018
CET1 capital (to risk weighted assets)	$	1,007,438		12.49	%	$	1,147,151		14.23	%		6.375	%		6.5	%
Total capital (to risk weighted assets)		1,297,427		16.08	%		1,217,140		15.10	%		9.875	%		10.0	%
Tier 1 capital (to risk weighted assets)		1,007,438		12.49	%		1,147,151		14.23	%		7.875	%		8.0	%
Tier 1 capital (to average assets)		1,007,438		12.10	%		1,147,151		13.78	%		5.000	%		5.0	%

	Three Months Ended			Nine Months Ended			Twelve Months Ended			Three Months Ended			Nine Months Ended
	September 30, 2019			September 30, 2019			December 31, 2018			September 30, 2018			September 30, 2018
Common shareholders’ equity				$	1,184,594		$	1,108,941					$	1,061,651
Less: Intangible assets					(104,915	)		(105,766	)					(106,481	)
Tangible common equity				$	1,079,679		$	1,003,175					$	955,170

Book value per common share				$	35.13		$	32.25					$	30.94
Less: Intangible book value per common share					(3.11	)		(3.08	)					(3.10	)
Tangible book value per common share				$	32.02		$	29.17					$	27.84

Total assets				$	9,003,467		$	8,389,137					$	8,057,855
Less: Intangible assets					(104,915	)		(105,766	)					(106,481	)
Tangible assets				$	8,898,552		$	8,283,371					$	7,951,374
Tangible common equity ratio					12.13	%		12.11	%					12.01	%

Average common shareholders’ equity	$	1,197,513		$	1,164,541		$	1,022,642		$	1,040,826		$	1,003,439
Less: Average intangible assets		(105,034	)		(105,297	)		(106,806	)		(106,629	)		(106,949	)
Average tangible common equity	$	1,092,479		$	1,059,245		$	915,836		$	934,197		$	896,490

Net Income Available to Common Shareholders	$	36,495		$	107,487		$	152,276		$	38,949		$	111,959
Average tangible common equity	$	1,092,479		$	1,059,245		$	915,836		$	934,197		$	896,490
Annualized Return on Average Tangible Common Equity		13.25	%		13.57	%		16.63	%		16.54	%		16.70	%

(dollars in thousands except per share data)	Nine Months Ended September 30, 2019
	GAAP			Change			Non-GAAP
Noninterest Expense
Nonperforming assets	$	59,137		$	(16,528	)	$	42,609
Nonperforming loans	$	57,650		$	(16,528	)	$	41,122

Other Ratios (annualized):
Nonperforming assets to total assets		0.66	%					0.47	%
Nonperforming loans to total loans		0.76	%					0.54	%
Allowance for credit losses to total nonperforming loans		127.87	%					179.27	%

Period	Total Number of Shares Purchased		Average Price Paid Per Share	Total Number of Shares Purchased as Part of Publicly Announced Plan or Program	Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs (1)
July 1-31, 2019	—	$	—	—	—
August 1-31, 2019	610,500		39.90	610,500	1,105,047
September 1-30, 2019	211,700		42.54	211,700	893,347
Total	822,200		40.58	822,200	893,347